India's ban on rice and wheat exports has been a failure

Prerna Sharma Singh is a director and co-founder of policy research and advisory company Indonomics Consulting in New Delhi and heads its agriculture, food and retail practice.

With its exports sagging and economic growth slowing, India has begun to lift restrictions on overseas shipments it imposed earlier this year in a bid to contain domestic inflationary pressures in the wake of spiking commodity prices resulting from the Ukraine war.

So far, New Delhi has removed controls on exports of organic non-basmati rice, steel and low-grade iron ore, and policymakers are understood to be considering lifting remaining limits on rice, wheat and sugar.

The relaxation of these restrictions is an implicit recognition that they have provided little benefit to India, and in fact have been largely counterproductive.

As India is the world's largest rice exporter, the imposition of restrictions covering the majority of its exports was both irresponsible and futile: irresponsible in that higher global rice prices were particularly painful for poorer developing nations, which were already struggling to pay for imports; futile in that the bigger culprit in India's domestic price pressures has been higher costs for chemical fertilizers, labor and other inputs.

The weakening of the rupee this year has aggravated the problem by further raising the effective cost of imported crude oil and fertilizers for Indian buyers, given that the products are traded globally in dollars. By boosting transportation costs, excessive state and federal fuel taxes have also kept prices high.

Populist moves by the government to raise minimum prices paid to farmers for their rice, wheat and sugar cane have also been inflationary, as well as a poor substitute for addressing low farm productivity. While Indian farmers produce four tons of rice paddy per hectare, their counterparts in Vietnam, the world's second-largest exporter, can grow six tons per hectare.

Overall retail-level food inflation was 7% in October, an improvement from 8.6% in September thanks to slower price growth for vegetables, edible oils, and lentils, beans and peas.

Notably, the pace of price hikes for wheat and rice accelerated after New Delhi restricted their export in May. Year-on-year retail wheat price growth went from 9.6% in April to 17.6% in October while rice inflation rose from 4% to 10.2%.

Aside from failing to curb price growth, India's selective export restrictions tend to encourage lobbying, bureaucratic corruption and cronyism. Well-connected companies that use restricted products as inputs can be relied on to seek the extension and expansion of controls to ensure that they have better access than foreign customers do. Makers of cotton yarn, for example, have lobbied New Delhi to ban cotton exports.

Export restrictions also disrupt shipments and turn India into an unreliable supplier. This is likely to cap future overseas demand for Indian agricultural and food products by prompting importers to seek new supplies in their own countries or elsewhere.

At the same time, denying producers and investors in India's agricultural value chain the opportunity to make profitable overseas sales will discourage them from making new investments. This will make management of future food price inflation even more difficult.

The announcement of stringent export curbs usually signals to the public that there is a serious supply shortage. That, in turn, encourages hoarding and speculation, which makes curbs even more ineffective at controlling prices. It is thus little wonder that rice and wheat prices have continued to rise since May.

Better options to provide short-term relief to consumers on grain prices would be to release stocks held by the state-owned Food Corp. of India on the open market and to reduce fuel taxes.

As of Nov. 1, the government held 16.56 million tons of rice and 26.37 million tons of unmilled rice. Given that quarterly operational requirements for rice distribution to the poor and for strategic reserves add up to just 10.25 million tons, there is more than enough surplus on hand. It is time for India to make use of these stocks.

In the longer term, better demand-supply forecasting, more regular weather updates to help farmers make timely sowing and harvesting decisions, and measures to deepen futures markets would help all parties in India manage food price moves more effectively, with no adverse side effects.

It is vital that New Delhi hold to a more predictable trade policy regime with respect to agricultural and food commodities. That, in turn, will encourage investment, especially needed in infrastructure to handle harvested crops. Such improvements can reduce post-harvest losses and keep food prices lower.

The focus of the country's national agricultural policy should shift from cereals to fruit, vegetables and protein-rich foods, including dairy and poultry, to match changes in consumer demand. Better coordination of demand and supply can help reduce price volatility, too. Finally, freer trade, rather than export bans, would be more conducive to price stability.