Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development, and employment.
Key Phrases: Lower-than-Expected production, Soaring Inflation, Letter of Credit, Minimum Export Price, Food Corporation of India, Brent Crude Oil.
Why in News?
- The Indian government has banned wheat exports with immediate effect in order to address lower-than-expected production and soaring inflation mainly arising out of the Russia-Ukraine war.
- There has been a sudden spike in prices of wheat due to multiple factors as a result of which the food security of India, neighbouring and other countries are at risk.
Key Highlights:
- The notification is issued in the interest of national food security after the sudden rise in the price of the food grain in the global market due to multiple factors.
- However, wheat export will be allowed in cases where an irrevocable letter of credit has already been issued before the notification.
- The export will be allowed on the basis of permission granted by the government to other countries to meet their food security needs based on the request of the governments, according to the notification.
- Trade experts believe the ban will bring down the market prices of wheat that had soared past the minimum support price (MSP) in recent months.
What are the factors behind the ban?
- Internal Factors:
- Several internal factors such as a record low procurement of wheat by the government agencies, low yield in major wheat-producing states due to extreme weather conditions, rising wheat prices, and spiralling inflation are the reasons behind the government’s decision to ban wheat export with immediate effect.
- Earlier, a large quantity of wheat was purchased by private players at rates above the MSP which led to an increase in market prices of wheat as farmers preferred to sell their wheat in the open market.
- The summer started early in March, thus, the yield is much less in northern states this year, and thus, the government procurement has gone below half and the export will impact food security.
- Impact of Russia Ukraine War:
- The Ukraine war is seen as the primary reason for not just the rise in wheat prices but also other commodities such as maize, oilseeds, and edible oils.
- Russia and Ukraine supply nearly 60 mt or 30 percent of wheat to the global market, while Ukraine is a crucial source of maize and sunflower oil supplies.
- The war has affected shipments from both nations, while prices of agricultural commodities are also rising in view of skyrocketing crude oil prices, which are ruling above $110 a barrel for both Brent and WTI grades.
What will be the impact of the wheat export ban?
- Rise in Wheat Price in domestic markets:
- Due to the soaring demand and higher prices offered by private traders, a shortage of wheat has caused a spike in wheat flour prices in the domestic markets.
- As per reports, all India monthly average retail price of wheat flour) was Rs 32.38 per kg in April, the highest since January 2010.
- The ban on wheat export will help to bring down the market prices of wheat and bring it closer to the MSP.
- This may further bring down the prices of wheat flour in the market and help the consumer absorb the brunt of rising inflation.
- Boost Procurement:
- The measure taken by the Centre would help the government agencies to boost their procurement from states where it has been lagging.
- Freeing up Stockpiles:
- Private traders will also be forced to free up their stockpiles that were held in anticipation of a further rise in prices.
- This is likely to result in a drop in the market prices of wheat.
Why the move is opposed by farmers?
- Overall Surplus wheat in stock:
- In spite of 60 lakh MT less production of wheat this year, from the overall grain management side, still, the government is in a surplus situation.
- Due to the rise in market price and higher private demand, purchase by government agencies is less.
- The farmers are getting a good price and they are only selling to the government what they could not sell in the market.
- Thus, they don't see a reason to ban exports, since, only 10 lakh MT is exported, though the contract for the first quarter is 40 lakh MT.
- Less Procurement by Government:
- The FCI procured wheat lowered by over 50 percent compared with the same period a year ago. The Centre had fixed a 44 mt procurement target for this year, but it procured 19.5 mt only.
- Gradual phasing down of exports:
- The government could have gradually filtered exports rather than resorting to a knee-jerk ban.
- A minimum export price (below which shipments cannot take place) or a tariff could have been introduced to help farmers earn more while calming down the market prices.
- The farmers were getting a slightly higher price for wheat due to the situation in Ukraine.
Conclusion:
- The government's order to curb wheat exports is to manage the country’s overall food security and support the needs of neighbouring and vulnerable countries.
- Further, exports will be permitted with government permission, where it is open to government-to-government deals, where India could look at helping any country facing food security.
Source: The Hindu BL
Mains Question:
Q. The Indian government’s decision to ban wheat exports will help to address lower-than-expected production of wheat and soaring inflation. Critically evaluate.
