Experience & Impact of Global Food Inflation on India & its Trading Partners
The Government of India banned exports of Wheat last year, this year it banned export of non-basmati rice and recently added 40% tariffs on onions.
This article provides insights into these three commodities and tomatoes from Indian situation to its impact of trade restrictions on major food trade partner countries.
Global Experience of Food Inflation
To begin with, the incidence of food inflation goes back to disruptions in the supply chain caused due to the pandemic. The present day picture of increase in global food prices is not only happening because of India’s actions but also due the termination of the Black Sea Grain Initiative after Russia’s invasion of Ukraine and extreme climate conditions across the world are other major contributing factors.
Global food prices are at historical highs despite a slowdown in many parts of the world such as China. This is weighing on international food prices because of muted demand from these places.
The World Bank expects its food price index to average lower in 2023 compared with 2022, driven by lower oil and grain prices. However, analysts say the future price trajectory will depend on the impact of El Niño weather phenomena and put further pressure on food markets.
Indian Experience of Food Inflation
Erratic climate conditions including the driest August in more than a century have sent food prices to 11.5% in India, which is a major player in global agri-trade.
The rising levels of food inflation are forcing the government to take quick actions. India’s central bank has already raised interest rates six times, and can do little more to control food inflation given that it is a supply-side problem.
Unfortunately, in coming months of festivals and celebrations in India, that call for variety of food items prepared in every household, this cost-push inflation will be supported by the demand-pull inflation. Higher food prices make the government vulnerable to criticism from opposition parties ahead of state elections, which are due next year.
So the government is left with little ammunition apart from imposing trade restrictions.
Trade restrictions could also exaggerate boom-bust price cycles. For instance, higher inflation in pulses in 2015-16 led India to significantly increase imports, but normal monsoons and stronger domestic production in subsequent years led to a supply glut, and prices crashed into deflation territory through 2017-18.
India’s Stance in 2023
India is a major supplier to rice in Asian and African markets. Following a ban on wheat exports in May 2022, India announced to stop non-basmati white rice exports last month. More recently, the finance ministry imposed a duty of 40% on onions to discourage exports and improve domestic supplies.
In the past, high prices of crops such as onions have led to electoral defeats in India; add to that an already wobbly consumption recovery. The higher cost of food, which makes for a big chunk of an average Indian’s expenses, can eat into discretionary incomes ahead of the upcoming festive season and derail this recovery further.
Next part of the article explains food inflation for four commodities Rice, Wheat, Onion, and Tomatoes with respect to major global trading partners/countries of India as per Directorate General of Foreign Trade (DGFT) data available till July 2023.
Through this exercise, we intend to understand interconnectedness of the global food supply chain and trade revolving around it. Given the highlighted stance of the Government of India, we keep India at a centre and select top partner countries for a particular commodity as a subject matter of article.
Wheat
Russia and Ukraine collaboratively contribute to almost 24% of the world’s total wheat exports. The war has led to a slump in wheat production from an area called the world’s wheat basket. Global buyers depended on supplies from India after exports from the Russia-Ukraine region plunged.
Owing to the surplus supplies, India exported wheat in heavy quantities during the last three years. But, the previous summer’s unseasonal heat waves caused the crops shriveling, causing a rise in domestic wheat prices. The central government curbed wheat exports in May 2022 to keep rising prices at bay.
The ban on wheat exports continues this year too but has failed to stop prices from growing, prompting officials to suggest that even this year’s crop is lower than the government’s estimates of a record 112.74 million metric tonnes. The recent untimely rainfall, hailstorms and high-velocity wind have damaged the standing wheat crop, which was ready for harvest, in some parts of these states, which could be the probable reasons for a reduction in crop yield this year.
However, the Indian export ban aggravated the situation, causing nations to stand at a crossroads because of the global food security crisis.
Bangladesh, Sri Lanka, UAE, Indonesia, Philippines, Yemen, Oman, Nepal, Qatar, South Korea, Malaysia, Afghanistan and Bhutan are top wheat importing countries from India.
- Bangladesh– After India’s export ban, Bangladesh has tried to secure wheat supplies through international tenders but rejected them due to high prices. The Bangladesh government is struggling to contain soaring commodity prices, with inflation at an eight-year high in May, while the country’s wheat stocks hit their lowest in three years.
- Sri Lanka– India has been a major exporting country of wheat for Sri Lanka. According to trade data 2021, 35.7% of the wheat imports (worth 138 million USD) of Sri Lanka were from India. With bans on wheat from India, it has shifted to buying wheat from Romania given limitations to buy it from Ukraine.
- United Arab Emirates (UAE)– The UAE issued an order suspending the export and re-export of wheat and wheat flour from Indian origin. This will not allow Indian wheat for purposes other than domestic consumption in the Gulf nation. This was done to ensure the UAE had enough grain for domestic consumption.
- Indonesia– Though India has banned wheat export; it did not extend to those backed by already issued Letters of Credit (LIC) and countries struggling with food security. India is considering allowing wheat export to Indonesia to meet its food grain demand. However, this would only be possible if Indonesia agreed to supply palm oil to India at a competitive rate without interruption. India is considering this arrangement to address the concern over a shortage of edible oil, which is one of the critical factors powering inflation.
- Philippines– India’s ban on wheat exports may cause the Philippines to shift to rice. The problem is that if there’s going to be a rush to buy rice, that will lead to an increase in demand and prices. The ban will affect the livestock industry, as inferior grades of wheat are primarily used to make animal feed.
Rice
India is a dominant player in the global rice market accounting for about 40% of global rice exports. In July 2023, India banned the exports of non-basmati rice to curb rising prices in the country and reduce unavailability caused by the El Nino disruptions.
Even though India continues to export parboiled and basmati rice dramatic effect has however been observed globally especially on the countries highly relying on this particular type which include Bangladesh, Nepal, Benin, Malaysia, Singapore, Djibouti, Qatar, Iraq, Gambia, Kuwait etc. The effect of the ban is most prominently observed in the South Asian and Central African countries which import 80% of their rice.
- Malaysia– It imports a considerable volume of rice from India and is likely to be severely hit if proper measures are not undertaken.
- Singapore– Singapore is highly dependent (17%) on not just rice but also the majority of the food produced and therefore the country is trying to negotiate and request for an exemption to which India agreed because of the very close ties. Following upon the exemption, India exported 50000 tonnes of rice to Singapore to meet their requirements
- Vietnam– The rice ban had cascading effects on Vietnam where prices surged the highest in 15 years with them now negotiating rice for higher prices and in Nepal where they increased by 16% after the ban.
- Middle-East Countries– The impact can be observed in the Middle-East countries also as even if there is exclusion of the basmati rice which is extensively used in their cuisine the concern is still valid as the ban is causing a rise in the cost of all the rice types. The UAE in response to the ban has chosen to stop exports and re-exports for four months to countries like Benin, Zimbabwe, Oman and Somalia.
- Nepal– The rice ban hit Nepal too, another highly rice import dependent nation however it has now negotiated with India to import rice and give tomatoes in exchange.
- India also exempted Bhutan and Mauritius and exported 1.43 lakhs tonnes of rice. According to the Directorate General of Foreign Trade, India exported 79000 tonnes to Bhutan, 14000 tonnes to Mauritius. In the previous year, India enforced a ban on broken rice but allowed for government-to-government (G2G) sales. Through this program, India exported approximately 800,000 tonnes of rice to Senegal, Indonesia, and the Gambia for humanitarian reasons.
Onions
India has reported the highest exports of onions in the last three years. Data from the Agricultural Produce Export Promotion Development Authority (APEDA) said India exported 25.25 lakh metric tonnes worth 561 million USD in 2022-23. This was the highest compared to 15.37 lakh tonnes worth 461 million USD in 2021-22 and 15.78 lakh tonnes worth 378 million USD in 2020-21.
Notwithstanding, the central government has decided to levy a duty of 40% on the export of the bulbs to improve domestic availability. Additionally, the move is expected to tame the local prices of onions before crucial elections in India next year. On the contrary, Indian exporters and traders feel that the duty might not help much in cooling down prices in the Indian markets, considering the shortage of onions caused by unseasonal rain this year.
Export duty will likely make Indian exports less competitive in the world markets. Still, Asian buyers will have to shell out as other exporters have a limited surplus to export. Asian countries like Bangladesh, Sri Lanka, Malaysia, UAE and Nepal rely heavily on India for their onion import.
In April-June 2023, India exported onions to 65 countries, of which a maximum quantity of 1.39 lakh tons was shipped to Bangladesh. Besides Bangladesh, Malaysia (1.07 lakh metric tons), United Arab Emirates (0.90 lakh metric tons), Sri Lanka (0.80 lakh metric tons), and Nepal (0.39 lakh metric tons) are among the top five destinations of Indian onions.
- Bangladesh– Although Bangladesh produces enough onions to meet domestic demand, a significant portion is imported yearly to cover supply problems resulting from post-harvest losses caused by insufficient storage facilities. Asia News Network reports that this move by India has led to an increment in the wholesale prices of onions by up to BDT 12 per kg.
- Nepal– Nepal is among the top five export destinations of Indian onions. An article in Business Standard reports that Nepal imposed a VAT of a hefty 13% on onions. Additionally, the importers and traders have to pay a vegetable import tax of 9% and an advance tax of 5%. The imposition of VAT on imported foods and vegetables is a new measure taken by the Nepalese government to meet their revenue collection target.
- UAE– The UAE is among the biggest markets for Indian onions. According to industry specialists, retailers in the country have said that India’s move won’t affect the availability or prices of the staple. There are plenty of onions in the UAE as the vegetable is sourced from other major markets such as Turkey, Egypt, Greece, the US and Italy.
Tomato
The increase in the prices of tomatoes in the last quite a few months has been extremely concerning to consumers and has indeed caused a dent to their pockets given the fact that tomatoes are an important ingredient of our food and we cannot immediately reduce its consumption of what we call the inelasticity of a commodity in economic terminology.
Let us first take a look at the production of tomatoes in India. The first set of produce comes in the period from March to August from the Rabi crop grown in Junnar in Maharashtra and also in parts of Andhra Pradesh and Karnataka. The second set providing the rest of the year is grown in parts of Uttar Pradesh and Nashik.
The story of the Great Tomato Crisis dates back to April and May this year due to extreme heat leading to pests attacking the crops which eventually forced the farmers to abandon the crops as there was lower yield and majority was of inferior quality. The scarcity of fresh produce resulted in higher market rates. Additionally the supply disruptions caused due to heavy rainfall in the key producing areas and the transportation process being severely affected.
Prices started skyrocketing roughly in the first week of June and went up to 80-120 kg in the retail market and 60-70 kg in the wholesale from Rs 3-5 kg reported in May. The prices in July went up as high as Rs.200 kg in north India. Due to heavy rainfalls the prices in the South were almost in the Rs.140 per kg range and in Mumbai it was in the Rs.160 per kg range.
In order to curb the inflation the government directed National Cooperative Consumers Federation (NCCF) and the National Agricultural Cooperative Marketing Federation (NAFED) to sell tomatoes at a retail price of Rs 50 per kg from 15th August. The tomatoes were procured from Karnataka and Maharashtra and were distributed to Delhi, West Bengal, Rajasthan through NAFED. Moreover, the NCCF distributed 8 lakh kg to these states. Additionally we started importing tomatoes from Nepal to boost our supply. The retail prices eased to Rs.97, Rs.100 and Rs.52 per kg in Delhi, Kolkata and Chennai respectively in mid-August.
Will food supply always be nation focused?
The Department of Food and Public Distribution said it deals with the “import and export of only wheat and non-basmati rice from central pool stocks available with FCI. WTO norms inter-alia restricts the export of food grains from public stocks procured for domestic consumption through welfare schemes.
However, humanitarian assistance, fully in grant form under the reference of the Ministry of External Affairs, to the deserving countries, is only allowed.
Wheat and non-basmati rice exported as humanitarian assistance from central pool stocks during FY15 to FY22 to countries like Sri Lanka, Afghanistan, Zimbabwe, Bhutan, Myanmar, Mozambique among others was 2,56,427 tonnes.
The Government of India faces a gridlock between should it focus on domestic food inflation amid upcoming elections or given global food inflation and international pressure hold no trade restrictions with respect to food.
With recent measures, it can be said that the Government of India is tilting its focus more towards domestic food demand and supply.
However, in months to come, it will have to find out a way around to supply wheat, non-basmati rice, and onion to its international trading ally probably through renegotiations with respect to other commodities.
Vaibhavi Pingale
Ms. Vaibhavi Pingale is a Visiting Faculty of Economics at Gokhale Institute of Politics and Economics, Pune & at Savitribai Phule Pune University. She is pursuing her PhD. She has been actively writing media articles other than academic research.
Mihir Kulkarni
Mihir Kulkarni is a Research Intern at Tatvita Analysts. He is pursuing his Graduation in Economics.
Manasi Pendharkar
Ms. Manasi Pendharkar has pursued her graduation in Economics. Presently, she is working as Academic Research Analyst with Tatvita Analysts.
