Given the likely glut in wheat due to higher production as well as imports, and the likelihood of prices falling due to this, especially in states where there is no MSP-linked guaranteed procurement by government agencies like FCI, it is not surprising food minister Ram Vilas Paswan is talking of the possibility of the government hiking import duties from zero right now. Indeed, influential farm leaders have already panned the government for allowing imports to take place while farmers could be facing lower prices.
Under the circumstances, while raising import duties on wheat may not be a bad idea, the government has to examine its role in the sorry state of affairs. Last year, while traders were projecting an output of around 82-83 million tonnes due to the drought, the government kept insisting the output would be 10 million tonnes higher. As a result, while wheat prices kept hardening, the government was slow to cut import duties—instead, it cut stocking limits for traders since it believed hoarding was behind the price rising. Finally, when prices didn’t let up, and India’s buffer stocks fell to multi-year lows, import duties were cut to 10% in September 2016 and to zero in December—it is after this that 5.5 million tonnes were imported.
Hiking import duties, as Paswan is suggesting, could help stabilise wheat prices and is important since, if prices fall beyond a point, this could affect sowing of wheat in the next season—in other words, long-term agriculture growth would get affected. In the case of pulses, a similar fall in prices is jeopardising the possibility of long-term production and those who imported at high prices are already looking at the possibility of large losses. But while raising duty levels will solve the immediate problem, the government needs to examine why it is getting its production estimates so wrong—a similar dispute over likely sugarcane production is keeping import duties at an unconscionably high 40%.
Rather than abruptly changing import duties, and often too late to be able to contain domestic prices, a better solution would be to allow futures trading to smooth price fluctuations. Since a well-functioning futures market will provide accurate price signals, imports can be made well in advance—of course, this will mean the stop-go export policies that are prevalent today will have to be stopped, as will the sudden and arbitrary changes in import duty.
Since farmers need to be allowed to export if they are to de-risk themselves while domestic prices can’t be allowed to sky-rocket due to weather shocks either, a sensible solution is to link import/export duties to price changes—if prices rise, say one standard deviation over trend, import duties could rise to 10% and to 15% if the fluctuations go to two standard deviations. Whether the government will go in for long-term reforms or prefer short-term fixes remains to be seen.
Source: financialexpress.com