Sunday 20 January 2019

The dynamics of India’s rice export boom

India has been the world’s top rice exporter since the beginning of this decade. But this boom has benefited only merchant capitalists, not consumers and producers
India emerged the world’s largest rice exporter in 2011-12, displacing Thailand from its leadership position. Two factors played a role in this. The first was the government’s decision in February 2011 to lift a four-year ban on exports of non-basmati varieties of rice, paving the way for a rise in exports of those varieties.
The second was a decision of the then Thai government under Prime Minister Yingluck Shinawatra, taken in the same year, to favour farmers by strengthening a Rice Pledging Scheme under which it promised to procure unlimited stocks at an enhanced price that reflected a 50 per cent increase over 2010. The consequent increase in domestic prices obviously reduced the incentive to sell in export markets rather than to the government or in the local market. India was a major beneficiary, recording a sharp increase in exports of non-basmati varieties. As opposed to exports of around 1,00,000 tonnes of The dynamics of India’s rice export boom - - The Hindu BusinessLine those varieties in 2010-11, exports soared to 4 million tonnes in 2011-12. Exports of basmati rice in those two years stood at 2.3 and 3.2 million tonnes respectively (Chart 1).
Non-basmati surge
Given the circumstances, the Indian rise to dominance in global rice markets is explained without much difficulty. What is striking, however, is the continuous increase in exports of non-basmati varieties since then, to 8.2 million tonnes in 2014-15, and after a fall to 6.4 million tonnes in the subsequent year, a rise again to 8.6 million tonnes in 2017-18. The result has been that despite the significant price difference between basmati and non-basmati rice varieties, the difference in foreign exchange earned from exports of these varieties has narrowed considerably (Chart 2).
The increase in non-basmati exports occurred despite the fact that the enhanced pledging scheme in Thailand was suspended in early 2014, that production in India did not rise much till 2016-17, having fluctuated between 104 and 107 million tonnes between 2011-12 and 2015-16, before rising to 110 and 113 million tonnes in the next two years, and that Vietnam has been a third important player in world markets. India’s share in world exports in recent years (2014-18) has stayed at 25-26 per cent, Thailand’s has fluctuated between 22 and 25 per cent, and Vietnam’s between 13 and 16 per cent. As a result, the exports to production ratio for rice in India rose from 2.4 per cent in 2009-10 to 6.8 per cent in 2011-12 and 9.6 per cent in 2012-13, after which it has fluctuated between 9.9 and 11.3 per cent. In normal circumstances, this should have resulted in a degree of price buoyancy in domestic markets, and discouraged exports. But the incentive to export seems to have remained high and persistent.
What this suggests is that over a relatively long period domestic demand for rice has remained below domestic availability, even after taking rising export ratios into account. This is surprising, because procurement introduces an ‘exogenous’ player in the form of the government into the market. Government procurement fluctuated between 32 and 35 million tonnes between 2011-12 and 2015-16, before rising to 38 million tonnes in the following two years when production was also rising.
The minimum support price (MSP) (adjusted for the paddy to rice conversion) at which rice was procured by the government, presumably setting a floor to market prices, rose over time but remained consistently below the export price for Grade A rice from India until mid-2015 (Chart 3). The recent sharper rise in MSP has more or less brought it to par. So rather than the procurement price, it may be the quantum of procurement that has been kept at levels that have not affected the incentive to export rice.
This limited effect of procurement on the incentive to export is reflected in the relationship between the export price and wholesale prices in three metro cities, for example. As Chart 4 shows, wholesale prices have more or less matched the export price in Delhi and Mumbai, though the wholesale price in Chennai is afflicted by unusual volatility that needs a separate explanation. Going by this trend, it appears that after non-basmati exports were liberalised, the international price has set the range of domestic prices, resulting in an implicit calibration of domestic prices with border prices.
Subdued domestic demand
Once again this suggests that domestic demand for rice has remained below domestic availability, despite the rising share of exports to domestic production. This subdued demand hits farmers, who find cultivation increasingly unviable despite rising rice exports.
Moreover, the benefit of a “disciplining” international price does not seem to have accrued to consumers. Retail prices in all metropolitan cities have remained well above the export price (Chart 5), showing high and rising distribution margins. So the liberalisation of the rice trade seems to have benefited only one section, the merchant capitalists, and not the actual producers or consumers.
The oil import bill is just one of the factors responsible for the rising trade de cit. Non-oil imports cannot be overlooked
India’s external account has once again emerged as a source of concern, as the current account deficit widened to reach 2.4 per cent of GDP over April-June 2018. This increase was driven entirely by the trade deficit, which grew rapidly in 2017-18. Since 2014, as Chart 1 shows, exports have been mostly stagnant (after a period of healthy increases before then) but total imports came down and then increased sharply in 2017-18. This was reflected in the total merchandise trade deficit, which declined for several years from the large deficit observed in 2013-14, and only rose sharply once again in 2017-18.
More recently, over the period April-November 2018, the trade deficit is once again said to have widened to ₹892 billion, an increase of 30 per cent over the same period in the previous year.
This timing suggests that global oil prices have been the significant driver of the total trade deficit. After all, India is a substantial net importer of oil. Periods of rising global oil prices have therefore been associated with higher total imports and when global oil prices fall or stay low, the import bill comes down correspondingly. So it seems only natural to assume that the external deficit is really driven by factors outside domestic policy control, particularly the vagaries of the global oil market. Indeed, there is no doubt that the Modi regime benefited hugely from the global decline in oil prices that was so marked in the first four years of its tenure, which reduced the pressure on the balance of trade, contributed to lower rates of domestic inflation, and provided windfall gains to the public coffers as the government did not pass on most of the oil price decline to consumers but instead raised tax rates.
However, matters with respect to the impact of oil prices on the balance of trade are not quite so simple. To start with, India is both an exporter and an importer of petroleum products, and the growing involvement of domestic oil refinery and distribution corporations (particularly the private ones) has made external trade in oil and oil products quite complicated.
Quite often, increased oil exports reflect the choices domestic oil companies make to produce for the domestic market or to export, which in turn are related to the local prices and duties, therefore driven by domestic policy. Chart 2, which shows only the oil trade balance, indicates that the oil deficit can increase even in periods of relatively low global oil prices (as in 2016-17) precisely because of such choices made by Indian oil corporations, especially the private players like Reliance.
What complicates matters further is the fact that non-oil imports have typically been high and rising rapidly. Chart 3 shows that even in the mid-2000s, non-oil trade was largely in balance and then began to show only relatively small deficits from 2006 onwards. After 2008 such deficits grew rapidly, as imports kept growing much faster than exports.
Rapid expansion
The non-oil merchandise trade de cit peaked in 2012-13, ironically a time when global oil prices were also not that low. They came down the following year, but then rose once more, as non-oil imports kept expanding rapidly. It is worth noting that this increase was driven by increasing import volumes, as prices for many of India’s imports also remained low. This is an important point, because it points to the fact that the potential of imports to displace domestic production has been much greater than is indicated only by the value of imports.
Indeed, increased imports of a variety of final goods, both primary and manufactured, have added to the woes of many small-scale producers in agriculture and industry as they have kept domestic prices of their output low, sometimes even below costs. This has also meant that even in the period of rise in oil prices in 2017-18, the non-oil trade deficit was even larger than the oil trade deficit. Chart 4 points to an interesting tendency: since 2004, the share of the oil deficit in the total balance of trade deficit has been coming down continuously, barring the outlier year of 2013-14 when world oil prices spiked sharply. This has also meant that even in the period of rise in oil prices in 2017-18, the non-oil trade deficit was even larger than the oil trade deficit. Chart 4 points to an interesting tendency: since 2004, the share of the oil deficit in the total balance of trade deficit has been coming down continuously, barring the outlier year of 2013-14 when world oil prices spiked sharply.
Indeed, from being 20 per cent more than the actual trade deficit (because the non-oil balance was in surplus then) it has fallen to explaining less than half — only 44 per cent of the deficit in 2017-18. So high global oil prices are only one of the many reasons why India should be concerned about the rising external trade deficit. The more significant culprits lie elsewhere, and they cannot be simplistically blamed on global forces beyond the government’s control.