#221 The Good, the Bad and the Ugly

Rice and Wheat Export Bans, and the National Research Foundation

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India Policy Watch: The Same Old Banned-wagon

Insights on current policy issues in India

— RSJ

India had a rainfall deficit in June. Experts attributed it to El Nino. July saw heavy rains in most parts of India that erased the June deficit. Experts think it is something to do with El Nino. One of the things to learn from the monsoon prediction experience in India is not to plan any policy based on it. While the national rainfall average is now somewhere close to ‘normal’, there is the usual problem of regional distribution. This time it is more skewed than usual so far. The north and northwest parts of India are seeing unprecedented floods, while the east and southeast parts have a significant deficit. The two major rice-producing states of the north, Punjab and Haryana, have seen paddy fields being flooded for more than a week, which has destroyed newly planted crops. The farmers will have to wait for the fields to dry out before replanting the seedlings. In the other rice belt of the east and southeast, the farmers haven’t been able to transplant the seedlings from nurseries to their fields because of low rainfall. Unsurprisingly then, the domestic price of rice, that’s been on a steady increase in the last few quarters, further went up 3 per cent in the last month. This hardening of prices will impact retail inflation. The cascading impact of monsoon and paddy prices has also been felt in de-oiled rice bran prices. Rice bran that has its oil extracted is used as cattle feed in India. An increase in its price will increase the price of milk and meat. The price of milk has gone up quite considerably in the last few months because of this.

So, the question is if the monsoon continues to be erratic and lopsided as it has been so far, leading to rising rice and cattle feed (de-oiled rice bran) prices, what should policymakers do? Should they let things play out for a bit, knowing that price is a signal and eventually the market will correct itself by people switching to other grains for some time, or will they reduce their consumption of other food items to accommodate rice in their diet? Or should they worry about food inflation in an election year and intervene in the market to correct things? Well, what do you think happened last week? The government intervened in the most obvious way it could.

Here’s TV18 reporting:

The Indian government recently announced a ban on the export of non-basmati white rice “with immediate effect" to stabilise the volatile retail prices in the country. The move has raised concerns across countries in Africa, Asia and even in the United States and is expected to surge food prices globally.

The Ministry of Consumer Affairs, Food and Public Distribution in a statement on July 20 said, “In order to ensure adequate availability of Non Basmati White Rice in the Indian market and to allay the rise in prices in the domestic market, Government of India has amended the Export Policy of above variety from ‘Free with export duty of 20%’ to ‘Prohibited’ with immediate effect.”

The ban is not only expected to inflate the food prices globally, but also put a pressure on the food supply in the US and burden rice exporting countries like Vietnam and Thailand.

But that wasn’t all the week's action for the Directorate General of Foreign Trade (DGFT). On Friday, it announced another export ban. Here’s the Mint reporting: 

After implementing a ban on white rice exports last week, the Centre has now moved exports of de-oiled rice bran (DORB) into the ‘prohibited’ category from the previously unrestricted ‘free’ category, according to a notification issued by the Directorate General of Foreign Trade (DGFT) on Friday.

The decision to restrict DORB exports until 30 November was prompted by a significant increase in domestic milk and milk product prices, primarily due to soaring fodder prices. DORB plays a vital role as a key ingredient in cattle, poultry and fish feed, with approximately 25% being used in cattle feed.

Two bans in a week. Clearly, the state is hard at work. Will it help citizens in the medium run? I’m not quite sure. The history of various export bans doesn't give me confidence that they work. Let’s see how things will likely play out with these bans.

The first issue to contend with is the usual problem of taking policy decisions using partial equilibrium instead of general equilibrium analysis. That is, picking up specific decision-making units or specific markets to analyse a ‘disequilibrium’ instead of considering all markets within the economy being in simultaneous equilibrium while arriving at a conclusion. So, yes, we have a scenario where the price of ordinary rice (non-basmati; side note: I hate the abomination that’s basmati like anyone who grew up eating rice as a staple food) is rising because of current supply disruptions, and it is likely these supply constraints will linger for a few months. By intervening and banning exports, the government believes it will bring the domestic demand and supply in equilibrium and stabilise the price. However, this is good if you only consider the welfare of consumers of rice. What about the farmers who produce rice? They have already taken a hit with many of them having to replant their seedlings at additional costs or delay in rains leading to the seedlings dying in the nursery. It is likely they will sow less than their usual quota of paddy this season and it will hurt their eventual crop output. If market forces had worked without any intervention, this deficit in production supply would have meant a short-term price spike that would have helped their incomes.

In the absence of this, their incomes will be lower this year because of a lower yield, and who knows what kind of cascading impact that might have on their debt, their ability to plant for the next season and their crop output on an ongoing basis? So, who is to decide whether it is better for the economy that the consumers are protected from a short-term spike in rice prices over farmers getting a good price for their produce in a year where their crop output will be hit apart from other negative consequences of erratic rainfall in their lives? If the price of rice rises briefly, can the consumer reduce their rice intake or find alternative cereals and tide over this period? What alternative does a farmer have if they don’t get their expected income that is already meagre because of poor rainfall? 

The second related problem is viewing India as a single market where goods and information flow freely and with limited friction. This isn’t true. There are rice or rice bran producing states, and there are consuming states. The cost of sending these commodities from producing states to consuming states isn’t always cheaper than exporting these commodities. So, it is possible that exporting rice or de-oiled rice bran (DORB) to Bangladesh from West Bengal might be cheaper than sending it to Maharashtra. In fact, this is true as this report suggests:

The Solvent Extractors’ Association of India (SEA) presented documents to the government explaining the challenges faced, particularly the high local freight costs for transporting DORB from eastern India to the southern and western parts of the country. “This will do irreparable damage not only to the oilseed sector but also to the oilseed farmer. It will also hit the rice milling industry and production of rice bran oil," SEA executive director B.V. Mehta said.

As far as the impact of rice bran extraction ban is concerned to reduce milk and milk products prices, “even if the price of the cattle feed is reduced say by 10%, cattle feed value may reduce by 2.5% and ultimately the milk price will reduce not more than 1%," explained Mehta.

So, for the oilseed farmer in West Bengal, it is an additional cost to find a buyer for his DORB output than it was before the export ban. If this additional cost makes it unviable for him to ship it to other states within India, he’d rather store and wait for the ban to overturn or let his produce rot than make further losses on it. This scenario isn’t a surprise to us. We are familiar with images of farmers destroying their crops because it is unviable to store or sell them at market prices. 

Thirdly, India is the dominant rice exporter in the world. Other rice-producing nations will likely ban exports too, because the lack of supply from India will begin to hurt them too. There is already a run on rice packets in stores across many markets. The global price of rice will continue to go up. This will mean rising food inflation in countries where rice is a staple. In a networked world where India is a net importer, it is not too difficult to see if there is rising inflation among its trade partners, it will eventually import that inflation also. This will not show up in data quickly but this is how it eventually pans out. Again, taking a partial equilibrium view obscures this medium reality. 

Additionally, a ban of this kind, where India is the leading exporter and which leads to a spike in global price of rice, will mean there is additional incentive for smuggling rice out of India. The functionaries of the state who have to enforce the ban will have all the incentive from the intermediaries who will want to ship rice out illegally. There will be other loopholes, like passing off non-basmati rice as basmati rice (who certifies this anyway?), that might be used to bypass this move. The usual ecosystem of kickbacks, corruption and rent-seeking behaviour follow. This is the old story of the state lining its pocket in the name of protecting the Indian consumer.

Lastly, there is never a clear date when bans of this kind get revoked. There was a ban on broken rice exports that was enforced last September and it is still on. The bans of this kind rollover because a cosy ecosystem that benefits from the ban builds up soon. They continue long after the domestic and global prices have come under control. The only losers tend to be the producers who don’t get a good deal for their hard work. 

The question I have is, what if the monsoon continues to be normal on average but erratic across regions? The supply of another lot of cereals and vegetables will then be impacted. This will then lead to a spike in their prices. Will the government continue to enforce export bans on one commodity after another commodity till it runs out of food items to ban? It sounds absurd when you think of a blanket export ban on every cereal and vegetable. But again, if you think a bit deeper, the export ban on a single commodity to stabilise the domestic price is equally absurd. The only solace is that’s an easier way to control prices or appear to control prices than asking the more important question. And that is this. Why, after so many years of trying to improve irrigation in the country and in the face of real climate change consequences, does our agriculture still depend so heavily on the monsoon? 

That’s the really difficult policy question.

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PolicyWTF: Ban the Ban

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

 - Pranay Kotasthane

We absolutely hate bans. So here’s another critique of the same ban. Apparently, the last time both rice and wheat exports were banned was during the 2007-08 global financial crisis. The stated reason for the bans is to control domestic inflation. Just to be sure, the government also banned the export of de-oiled rice bran a couple of days ago, citing the high fodder, and hence milk, prices.

You already know where this article’s going. Nevertheless, it must be taken there.

These export bans are simultaneously ineffective, erroneous, and counterproductive. Here’s why.

The ban is erroneous because it again shortchanges India’s farmers. With the two big exporters of wheat engaged in a war and with one of them bombing the other’s grain silos, global wheat prices have risen sharply. Even though India isn’t a big exporter of wheat, this could’ve been a windfall export season for Indian wheat growers. But alas, that was not to be.

The ban reminds me of what Saurabh Chandra, a co-conspirator at Puliyabaazi, said about grain farming in India. He said that a combination of MSP, high entry and exit barriers, and knee-jerk trade policies make farmers akin to contracted government employees rather than independent businesspersons. The only agency farmers have is to protest for keeping entry barriers and procurement prices high, much like an employee union. In exchange, the government claims the right to ban exports at a whim, citing the domestic consumer's interest. This sub-optimal quid pro quo is an important reason why farming remains a lethargic sector in India.

Now, let’s discuss why the move is counterproductive. When a country imposes semiconductor and software export controls on another country, the Indian strategic community immediately cries in unison about how the supply chain has been weaponised and how these countries could well do the same to “us” tomorrow. But when India bans the sale of a commodity of which it alone accounts for 10% of global exports, we will take umbrage if the world sees it as India weaponising the grain supply chain.

I know I got all moralistic there. Of course, international relations are an amoral arena, so nation-states use all tools they can. Nevertheless, this ban makes no sense, even from a realist lens. India has a chance to pose as a real Vishwaguru that’s rescuing the world on the verge of a global food crisis. Maybe there are some deals to be struck with the West. To be fair, the government did claim that India would continue to export wheat to “neighbours in need”. But I sense this is an opportunity lost to make a statement about India’s power as a geopolitical actor.

Both these fallacies could have been overlooked if there were a chance that the ban would reduce inflation. But even that’s not likely to be the case. Ashok Gulati and Ritika Juneja explain why.

“But will this help tame inflation at home? The answer is no. To understand this, we must look at the contribution of different items to inflation. In May, the consumer price index (CPI) inflation was 7.04 per cent (YoY). The cereals group as a whole contributed only 6.6 per cent to this inflation. Within that, wheat, other than through PDS, contributed just 3.11 per cent and non-PDS rice contributed 1.59 per cent. So, by imposing a ban on wheat and rice exports, India can’t tame its inflation as more than 95 per cent of CPI inflation is due to other items. Interestingly, inflation in vegetables contributed 14.4 per cent to CPI inflation, which is more than three times the contribution of rice and wheat combined. And within vegetables, tomatoes alone contributed 7.01 per cent. Will the government now ban tomato exports?” [Indian Express, 4 July 2023]

Moreover, there is no shortage of grain procurement and subsidised public distribution. Enough stocks are already available. Not only is the policy erroneous and counterproductive but also ineffective in achieving the stated goals.

The only reason why it makes sense is to see it through a political economy lens. The government perhaps feels the need to show its fight against inflation in a year packed with elections. Here again, the government had better options at its disposal. As Gulati and Juneja write, the government could’ve begun with an export tax, not an outright ban.

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Not(PolicyWTF): The Next Big Jump

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

 - Pranay Kotasthane

A month ago, the Union cabinet approved the Introduction of National Research Foundation Bill, 2023. It’s listed for introduction in the ongoing parliamentary session. Modelled after the National Science Foundation (NSF) set up in the US in 1950, NRF is aimed at improving the quality of scientific research in India.

This announcement has generated considerable excitement. The text of the bill is not yet in the public domain. However, a number of high-quality newspaper articles on this topic give us a glimpse of the provisions. Of the ones I managed to go through, Naushad Forbes’ Business Standard article gets to the heart of the issue. These are his main arguments.

Saying that India spends little on R&D is not useful, as this broad-stroke analysis often leads to inaccurate policy solutions. The union government’s R&D spending (0.3% of GDP) is actually in line with many other governments. Instead, there are two specific problems under the hood: one, India’s private sector in-house R&D spending is pathetic (0.25% of GDP) compared to the world average (1.4% of GDP); and little research gets done in institutes of higher education (allocated 0.04% of GDP) since we still follow a socialist-era model of autonomous research institutes. NRF will be useful in addressing the second problem.

Forbes explains the features of NRF lucidly here:

Approximately 20 per cent of the Union government spending on R&D is for scientific research [rest is for technological research in space, defence, etc.]. By locating our publicly-funded scientific research primarily in autonomous laboratories instead of the higher education system, we miss a huge opportunity. The NRF is a good beginning to address this opportunity. It gets some essential features right. It allocates Rs 50,000 crore over five years, or Rs 10,000 crore a year, for funding research in higher education. Scientists working in autonomous national laboratories are eligible only if the work is done jointly with an academic researcher.  This condition is essential. It must not be diluted for the NRF to have an impact. And academics working at both public and private higher education institutions are eligible. This, again, is critical: In the US, funding from the National Science Foundation and National Institutes of Health does not distinguish between public or private, and has directly contributed to building the world’s leading higher education system. The quantum of funding, at Rs 10,000 crore per year, would double research done within the higher education system, raising its share from 0.04 to 0.1 per cent of GDP. This reduces the gap, but we still have a long way to go to match the world average of 0.35 per cent. [NRF: A landmark initiative, Business Standard].

Spent Wadia, in his Indian Express article, highlights that government support for R&D is designed as a block grant, without mandates on allocations to sub-heads such as human resources, consumables, and capital. This also seems to be a good move. Let the NRF grants not become another Centrally Sponsored Scheme (CSS) where top-down mandates on expenditure sub-heads fail to account for the differences in the recipients’ conditions.

From a macro policy perspective, the NRF is a welcome addition. It’s a much-needed institution as India looks to expand its economic complexity beyond software services, agriculture, and subpar manufacturing.

A word of caution: many a new institutions in India underachieve due to hyper multi-objective optimisation. Perhaps it would be better to focus the first few years of NRF grants on science to avoid this pitfall before incorporating the humanities disciplines. Moreover, betting on good proposals requires a risk appetite and immense state capacity. By definition, many more projects should fail than succeed. This requires setting up the NRF with the incentives to optimise for excellence over everything else.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Book] If you want to understand the root causes of the current situation in Manipur, check out Sudeep Chakravarti’s The Eastern Gate.

2. [Blog] Alex Tabarrok explains the Economics of Export Bans.

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