Opinion
The double whammy of the Russian war on Ukraine and changing climate poses a serious threat of food insecurity to several countries in Asia and Africa. The UN’s World Food Programme estimates that about 44 million people in 38 countries are already at ‘emergency levels of hunger’. Amidst rising global food prices, a number of countries have banned export of agricultural commodities. As of May 29 2022, 18 countries (excluding Russia and Ukraine) have imposed bans on exports of various commodities like wheat, pasta, corn, chicken and vegetable oils.
Rising temperatures and drier-than-usual weather conditions have adversely impacted crops (and sowing) in several countries including the U.S., Canada, Argentina, India and those in the European Union. The Russian war on Ukraine has shrunk global supply of wheat, corn, sunflower oil and fertilisers. Globally, the food price index has breached the 2008-food crisis levels. In April 2022, yearly food inflation averaged 30% .
In April 2022, India’s food index grew by 8.8% and the overall index grew by 15.1% at the yearly wholesale level. At the retail level (CPI), these rates were 8.4% and 7.8%, respectively.
Tough situation for Indian farmers
It is not only the bans on exports which cause adverse terms of trade for farmers. The farmers growing perishable crops like fruits and vegetables are highly vulnerable to fluctuations in market prices. For example, the market price of rabi onion in Lasalgaon was only ₹700-950 per quintal between May 15 and May 28, 2022. It barely covers even the cost of cultivation.
The rising cost of inputs also contribute to deterioration in terms of trade. Rising cost of crude and the Russian war have resulted in high prices of imported fertilisers. In April 2022, the global price of DAP (di-ammonium phosphate) was $954 per tonne, compared to $543 per tonne in April 2021.
Farmers cannot pay the market price of imported DAP. Therefore, the subsidy bill of the government will be much higher this year. In 2022-23, the Union government budgeted only ₹1.05 lakh crore as fertiliser subsidy. Due to higher price of imported fertilisers, the subsidy bill of the government may go up to ₹2.15 lakh crore.
The higher price of diesel has also adversely impacted the terms of trade for farmers. There is a growing possibility of a hike in electricity rates also due to import of more expensive coal. Since the start of the COVID-19 pandemic, the health expenditure of farmers would have also gone up. Similarly, other services like education have become more expensive. The cost of the lowest recharge of a prepaid mobile phone has doubled in the last one year.
Farmers fear that in order to check food inflation, the government may grant only a modest increase (of about 5-6%) in the minimum support price (MSP) of kharif crops in 2022-23. With high and rising input costs, the terms of trade for farmers are likely to become even more adverse.
Four tools
To defuse inflationary pressures in food, the government has used four tools since 2021: it restricted exports, opened imports, applied domestic trade and stocking restrictions via the Essential Commodities Act (ECA) and signed MOUs to augment supplies.
India has banned wheat exports recently and capped its export of sugar at 10 million tonnes.
In the case of pulses, the government applied all these tools together. Last year, due to high inflation in tur, lentil and urad, the government imposed stock limits. From May 15, 2021, the import of tur, urad and moong was notified in ‘free category’. It has now been extended to March 2023. The government also signed MOUs with Malawi, Myanmar and Mozambique for import of tur and urad. Import of 6.7 lakh tonnes of masoor from Canada was allowed at zero duty in 2021-22.
Similarly, the government has allowed duty-free import of 20 lakh metric tonnes of crude soyabean oil and crude sunflower oil a year in 2022-23 and 2023-24.
The government also suspended futures trading in several agricultural commodities. In December 2021, the contracts of chana, crude palm oil, moong, mustard seeds and its derivatives, wheat, non-basmati paddy and soya bean and its derivatives were suspended. Even though chana prices have been ruling below the MSP, the suspension of futures contracts continues.
Consumers’ interests
These decisions are taken by the government to check food inflation even though the farmers are adversely affected. It must, however, be acknowledged that some farmers (for example, cotton) realised much higher prices last year due to high prices, on global cues.
On the whole, the task of the government is unenviable. It has to do a fine balancing act to protect the interests of both the farmers and the consumers. The number of consumers is much larger than the number of cultivators and they are more vocal. Most cultivators are small and marginal, and they are also net consumers. There is therefore a need for continuous fine-tuning of trade policy so that the interest of farmers is not compromised. It is now commonly believed that many farmers store their produce in anticipation of a higher price. But the extent of such practices is not known. There is a need for a professional study to understand this phenomenon.
The authors are promoters of Arcus Policy Research. Siraj Hussain is a former Union Agriculture Secretary; Shweta Saini is an economist.
