Obtrusive controls on food supply and distribution are a major constraint on exports. They aren't also good for India's fiscal health

In the backdrop of increase in international price of wheat (courtesy, Ukraine crisis) early this month, Prime Minister Narendra Modi, had exhorted that India can help meet the global requirements of food deficit countries, provided the World Trade Organisation (WTO) allows it. He also exuded confidence that this had created anopportunity for Indian farmers to increase their income.

Even as stakeholders were gearing to undertake export with several of themhaving signed contracts, on May 13, 2022, the Director General of Foreign Trade (DGFT) put a ban on wheat export with 'immediate' effect.The exports under government-to-Government arrangements and contracts signed prior to that dateare exempt. The Government has sought to explain the ban in terms of lower than anticipated domestic production (during 2021-22, it is estimated to be around 106 million tons against the target of 111 million tons - courtesy, heat waves and record high temperature) and Modi's commitment to food security.Both the reasons are untenable.

The shortfall of 5 million tons which is just about 4 percent of the targeted production isn't such a big quantity that would have justified policy reversal. Even so, the effect of the heat wave/high temperature was known even in March, 2022. As for the government's commitment to food security, that too is a known fact. Actually, the trigger lies elsewhere.

Under its program of public stockholding (PSH) for food security, the Centre directs its agencies like the Food Corporation of India (FCI) to buy food - mainly wheat, rice and cereals from farmers at the minimum support price (MSP) and distribute at heavily subsidized price of Rs 1/2/3 per kg to over 800 million personsthrough the public distribution system (PDS) under National Food Security Act (NFSA).

Unlike in the past, when farmers would sell their produce largely to the State agencies, this time, they are selling more to private traders who have offered much higher price than MSP.This has resulted in significant drop in the quantity procured bythe agencies.

Another factorhas to do with Centre's decisionto extend the Pradhan Mantri Garib Kalyan Anna Yojana or PMGKAY (under it,the Government gives five kg of rice or wheat per person per month to each of the 800 million persons for "free"; started in March 2020, to mitigate the pandemic, its fifth and the last phase ended on March 31, 2022) for a further six months till September 30, 2022.It has come as a bolt from the blue.

As a result, the Centre will have to arrange for at least 25 million tons of grains either wheat or rice(that was not accounted for earlier) over and above the 50 million tons or so required under the NFSA. In short, less procurement and more requirement has made the government scary about its ability to feed the PDS; hence the export ban. But the U-turn now doesn't bode well.

First, Indian farmers will be denied the opportunity of realizing a price higher than the MSP. Second, traders especially those who had procured, stored and dispatched truck loads for exportswould end up incurring huge loss having to sell in the domestic market at lower price besides irrecoverable expenses on logistics. Third, this will dent India's credibility as a reliable exporter. 

The Government should reconsider its decision and remove the ban. As for serving domestic consumers, reduced availability of wheat due toexport can be offset by its substitution with rice in the PDS basket besides pruning leakages in the system.It should also focus on addressing the

implications of exporting wheat from 'public stockholding' under the WTO.

Under PSH, the Centre pays the excess of MSP plus handling, storage and distribution cost over the selling price (Rs 1/2/3 per kg) as subsidy. It has two components: (a) subsidy to the farmer being the excess of MSP over its international price, also known as External Reference Price (ERP); (b) subsidy to the food consumer being the excess of ERP over the pricepaid (Rs 2 per kg wheat).The WTO is concerned with (a), branded as "product-specific" subsidies.

This - plus subsidy on agri-inputs like fertilizers, seed, etc., or "non-product specific" subsidies - gives what is termed as aggregate measurement support (AMS). Under the Agreement on Agriculture (AoA), AMS is capped at 10 percent of the value of agricultural production for a developing country. If a member-country gives AMS in excess of 10 percent, it is a violation.

At present, India enjoys protection under a "peace clause". Under it, "if a developing country gives AMS in excess of 10%, no member will challenge this until a permanent solution is found."But, it comes with several riders, such as submission of data on food procurement, stockholding, distribution, and subsidies. 

This makes India vulnerable, which is evident from some countries insisting on 'safeguards' and 'transparency' obligations after it invoked the peace clause in 2018-19.To get over these vulnerabilities, India is now asking WTO for 'total exemption for support to PSH for food security'.

For it to get the proposal through, India will have to demonstrate that 'all' purchases from Indian farmers are used only for supplying to beneficiaries under the NFSA/PDS; that no quantity ever reaches the international market. But, export from PSHruns contrary to this fundamental premise; hence a violation of WTO.

India could get around arguing that these exports - organized under Government-to-Government contracts - are meant for meeting the 'food security' needs of the importing country. Considering the present extraordinary circumstances, WTO may agree to carving out a speciation dispensation for now. But, blanket exemption for all time to come won't happen.

This is because there is always a possibility of the material finding its way to the international market, say a private trader exporting grains purchased by her from the FCI under bulk sale conducted by the latter to get rid of its excess stock.

How can India continue to protect beneficiaries under NFSA and increase food exports without violating its commitment under the WTO?

Protecting farmers by giving a guaranteed MSP is pregnant with the risk of AMS remaining well above the 10 percent threshold, hence violate WTO. At another level, obtrusive controls on food supply and distribution are a major constraint on exports.They are not good for India's fiscal health either.

Instead of making subsidized food available, the Government should only focus on giving subsidy to beneficiaries (albeit poor) through direct benefit transfer (DBT) and leave the rest to market forces. Likewise, support to the poor farmers may be given as DBT. Subsidy given in this form will be much less as undeserving beneficiaries are excluded,leakages plugged and inefficiencies eliminated. This will improve country's fiscal health.Since, DBTto farmers is not subject to cap under the AoA, there won't be any violation of WTO.

With the unshackling of the sector, there will be incentive for private firms to invest and build robust supply and distribution systems for meeting domestic demand and undertake exports in a sustainable manner. This will also help farmers realize better prices for their produce (if the three farm lawsare also resurrected, that will be the 'icing on  the cake').

(The writer is a policy analyst. The views expressed are personal.)