A to-do list for inflation (GS Paper 3, Economy)
Introduction
- The Reserve Bank of India needs to be complimented for broadly containing the consumer price inflation within its mandated range of 4+/- 2 per cent.
- The food inflation, which is hovering around 8 percent has led the government to go into overdrive mode to contain inflation. This has resulted in harming farmers.
The recent decline in India’s agri-imports
- India’s agri-imports in 2023-24 have registered a notable decline of 8 per cent, dropping from $35.7 billion in 2022-23 to $32.8 billion in 2023-24.
- Interestingly, the average annual growth rate (AAGR) observed in agricultural imports during the 10 years of the Narendra Modi government appears to have slowed down — from 14 per cent during the UPA government (2004-05 to 2013-14) to 9 per cent during 2014-15 to 2023-24.
Reasons for decline in agri-import bills
A drop in the international price of edible oil
- It is noteworthy that the decline in the value of agricultural imports in 2023-24 was primarily due to edible oils, plummeting by 28.5 per cent, from $20.8 billion to $14.9 billion in a single year.
- However, in terms of quantity, it remained relatively stable, hovering around 15-16 million metric tonnes (MT) during both 2022-23 and 2023-24.
- India imports roughly 55 to 60 per cent of its edible oil consumption.
- Within the spectrum of edible oils, palm oil accounts for over 50 per cent, followed by soybean and sunflower.
- The principal factor contributing to the decline in import values is the decrease in palm oil prices in international markets.
- The FAO’s vegetable oil sub-index averaged 168.5 points in 2022-23, dropping to 123.4 points in 2023-24, indicating reduced global prices, consequently lowering India’s vegetable oil import bill in 2023-24.
Other import items
- Next to edible oil, it is pulses, fresh fruits and vegetables (F&V), sugar, spices, cashew, and various other items that comprise India’s agri-imports.
The price fluctuation of pulses
Historical context
- The import of pulses, which had declined from its peak of $4.2 billion in 2016-17 (a record 6.6 MT) to $1.9 billion in 2022-23 (2.5 MT), suddenly doubled to $3.7 billion in 2023-24 (4.7 MT).
- In 2016-17, pulses production at home had suddenly increased by about 6 MT, while imports also hovered around the same quantity.
- This led to a glut and domestic prices of many pulses went below minimum support prices (MSP).
- GoI had to impose a 30 per cent import tariff on lentils, pigeon pea/tur, and chickpea, followed by quantity restrictions.
- Later, the import tariff on chickpea increased to 40 and then to 60 per cent by March 2018.
- For yellow/white peas, a 50 per cent duty was combined with a minimum price of Rs 200/kg, implemented in December 2019, effectively prohibiting imports below this threshold.
- This was to give high protection to domestic production of pulses.
The current status of pulses
- However, since then, the increase in pulse production has been sluggish, hovering around 25-27 MMT.
- Import restrictions, coupled with somewhat sluggish growth in domestic production, are leading to high inflation in pulses.
- Even in April 2024, pulses group registered an inflation of 17 per cent, while tur showed an inflation of 31 per cent.
- This is worrying the government and no wonder, they are liberalising the imports of pulses at zero import duty, which will remain in place until the end of 2024-25.
- This is likely to hit the farmers, though it will help in taming pulses prices for consumers. Again a sign of consumer bias.
A rational trade policy that dovetails well with domestic MSP policy
1. Policy regarding pulses
- First, instead of a sudden drop to zero import duty, it could have been more calibrated.
- Second, it must ensure that the landed price is not below the MSP of major pulses.
- Third, if domestic prices go below MSP, then NAFED should undertake large scale procurement at MSP to build its buffer stocks. Else, we are afraid, pulses farmers will lose heavily and their enthusiasm to produce more pulses may wane soon.
2. Policy regarding edible oils/oilseeds
- A similar policy has to be adopted in case of edible oils/oilseeds, that is, ensuring that landed price of edible oils should not be below the domestic MSP of oilseeds converted to oil.
- Else, the vision of the Prime Minister to achieve relative self-reliance in edible oils through the National Edible Oil Mission-Oil Palm (NEOM-OP) will wash away.
- Having said this, Indian policymakers must recognise that achieving self-sufficiency in edible oils through traditional oilseeds like mustard, groundnuts, and soybeans would necessitate an additional area under oilseeds to the tune of 35 to 40 million hectares, which is not feasible.
- Only way is to promote palm oil at home on about 2 million hectares that is identified as a suitable area for this crop.
- This is the only crop that can give almost 4 tonnes of oil/ha.
Conclusion
- The key lesson is that trade policy, especially import liberalisation, has to be well integrated with MSP policy at home.
- This is important for pulses and oilseeds, which demand less water and less fertilisers. Thus, farmers’ and the planet’s interests must go hand in hand.
