Grain of sense goi should reverse wheat export ban prices can be controlled by other means

Grain of sense goi should reverse wheat export ban prices can be controlled by other means

On Monday, the price of wheat in the futures market in Chicago rose 6% in response to India’s decision on May 13 to prohibit incremental export of wheat. New contracts have to be through the government-to-government route. India’s original wheat export target in 2022-23, about 12 million tonnes, is unlikely to have placed it among the world’s top five exporters. Yet global supply is so tight that the impact on prices was immediate. It also led to expressions of disquiet by representatives of the German and US governments.

The aim of the export restriction is to rein in domestic wheat prices – the cereal’s price rose by an annual 10.7% in April in wholesale markets. There can be no disagreement with GoI’s underlying aim. But recourse to an export restriction is a suboptimal choice. Wheat inflation is being mainly driven by a market expectation that the rabi harvest will be lower than what GoI announced. To illustrate, consider the price trend in the wholesale market before and after the export shutdown. GoI data shows that the national average wholesale price on May 12, the day before the announcement, was Rs 2,591/quintal. Two days later, it fell 4.6% to Rs 2,483/quintal. However, by yesterday, it climbed back to Rs 2,583/quintal.

Moreover, an export restriction is an implicit tax on wheat farmers. Instead of using such a distortionary policy measure, which is inimical to GoI’s reform agenda in agriculture, fiscal measures should have been used to enhance domestic supply. GoI could have topped up the wheat MSP of Rs 2,015/quintal to boost its procurement and put itself in a powerful position to influence the domestic price trend. This is one occasion when a higher MSP would have been economically rational. GoI’s decision has only led to anxious allies and frustrated farmers. The export ban should be reversed.