The government went to another extreme by banning exports on Saturday, just days after it announced a record wheat shipment target this year. Although the decision was prompted by the fact that the price of domestic wheat reached record highs after the heat wave reduced production, the question is whether such a sledgehammer method was necessary. The answer is no. Justifying the decision, a government official told Reuters that for the government, the ban was “an abundance of caution” following the sharp rise in inflation. Call it a knee jerk or an abundance of caution, the problem is that it is a standard response of the government when it imposes restrictions on the export of various products from time to time. See how many times (on average three times a year) export bans were imposed on onions at the slightest hint of trouble.
No one can deny that some measures were needed to cool the domestic price of wheat. In February, the government forecast 111.32 million tons of production, the sixth record crop, but it cut its forecast to 105 million tons in May. The latest estimate is that the crop could be around 100 million tons or less, and government procurement has fallen by more than 50%, increasing the likelihood that stocks will be insufficient to ensure subsidized supplies under the National Food Security Act. The government also said that private traders need not worry because about 4 million tonnes of wheat, which has already been contracted to be shipped with a letter of credit, will be allowed to be exported. While these arguments have some merits, the point is that there was no need for sudden export bans. The objective can be achieved by adopting export calibration through minimum export price or export duty. Several wheat exporting countries have done just that.
The fact of the matter is that even if the ban is in favor of the consumers, it hurts the interests of the farmers. Although farmers have suffered losses due to oversupply and low prices, they have been unable to take advantage of high prices in the face of growing grain shortages and rising demand in the international market if exports are banned. As Ashok Gulati and Sanchit Gupta write in The Indian Express, the abrupt export ban reflects a deep-rooted urban consumer bias that indirectly becomes anti-farmer. ICRIER has done a great job with OECD on agricultural pricing policy, showing that imposing stock limits on traders and export bans act as an underlying tax on farmers.
Another big problem is the timing of the announcement. This raises serious questions about the credibility of India’s export policy. The announcement comes just a week after Prime Minister Narendra Modi’s directive that all steps be taken to ensure quality and standard so that India becomes a secure source of food grains and other agricultural products. It is unknown at this time what he will do after leaving the post. The agriculture ministers of the G7 countries have already said they would recommend discussing the issue at the G7 summit in Germany in June, where Modi has been invited to attend. Buyers worldwide were banking on supply from the world’s second-largest wheat producer after exports from the Black Sea region declined after Russia’s invasion of Ukraine. While not one of the world’s top wheat exporters, India’s sanctions could push global prices to new heights, which could hit poorer consumers in Asia and Africa particularly hard due to already tight supplies. Traders are already predicting chaotic transactions as the international wheat market opens on Monday as the ban will be a blow to buyers seeking wheat supplies. In short, the decision to ban exports is an extreme step that should have been avoided. It will do little to control inflation and will badly reflect India’s image as a nation extending a helping hand to the world’s poor when it is most important.