Indian farmers lost about Rs 40,000 crore as a result of steps taken by the Union government to curb food inflation, a report released by the Indian Council for Research on International Economic Relations has said.

The report, published on September 14, said that a 25.4% inflation rate in wheat prices recorded in February “heightened the panic” in the government as market prices for the crop were higher than its minimum support price.

“The concern was that if the market prices stayed like that, government would not be able to procure enough to meet its public distribution system commitments,” the report noted.

To bring the market prices down to the minimum support price level, the report said, the government offloaded 3.4 million metric tonnes of wheat at prices below the cost incurred in producing the crop. Besides, the government – for the first time in 15 years – imposed limits on the stocking of wheat in an attempt to tame inflation.

The report said that although these decisions brought the inflation in wheat prices down to 9.33% by August, they ended up amounting to an “implicit tax” on the farmers, thereby resulting in them losing income.

The researchers said that in the 2023-’24 marketing season for the rabi crops, the minimum support price for wheat was set at Rs 2,125 per quintal, while the market price was around Rs 2,673 per quintal in January.

“To stabilise domestic wheat prices, the government initiated OMSS [Open Market Sale Scheme] sales in February, offering wheat at a substantially reduced price, starting at Rs 2,350 per quintal and later at even lower price of Rs 2,150,” the report said. “This OMSS price was lower than the economic cost of wheat, which was at Rs 2,654 per quintal during 2022-’23.”

The study said that had the Centre not intervened, farmers could have earned an additional Rs 548 per quintal from their sales of wheat, totaling about Rs 40,000 crore.

Wheat export

The study also noted that in the financial year 2021-’22, India had exported 7.5 milliion metric tonnes of wheat at a time when the global prices were surging due to the Russia-Ukraine war. It said that India could have exported more, benefitting farmers as domestic prices were rising along with the global trend.

Such policy measures indicate a bias in favour of urban consumers in India, the report said.

“The approach reflects a strong ‘pro-consumer bias’ in India’s food price policy,” it noted. “When more than 800 million [80 crore] people are already getting free wheat and/or rice [5kg/person/month] under PM Garib Kalyan Yojana, one wonders whom is the government trying to protect by supressing market prices. Is it the urban middle class at the cost of farmers?”

The report said that other farmers will also suffer similar losses due to the government’s policies.

“Similar policies [as done in wheat] have been followed in case of rice,” it said. “The market price is being brought down to the level of the MSP announced. In the approaching procurement season, paddy farmers will suffer losses just as wheat farmers have. Their ‘implicit taxation’ could be higher. Similar restrictive policies are in place for pulses farmers, and now even onion farmers!”

Losses to India’s trade partners

The report also said that the bans imposed by the government on rice export in September 2022 and July this year hurt India’s trade partners, most of whom are heavily dependent on the produce.

It said that rather than imposing an export duty on rice and then gradually increasing it, the government banned the export of non-basmati rice in July, resulting in panic not only in African countries but also among the Indian diaspora in the United States.

“This is not in line with the spirit of G20 proposals to ensure global food security, as it has hit the African countries most which account for a substantial [53.89%] share of non-basmati exports from India,” the report said.

It added that despite the ban, the retail inflation rate in August for rice remained at 12.54%, showing the “limited effectiveness of the restrictive policies chosen to tame inflation”.

Suggestions to curb inflation

The researchers of the report have suggested that the government should calibrate its trade policy instead of following a “protectionist trade policy” to control surging prices. They suggested that a timely reduction in import duty, as done in cases of edible oil, as a measure to control prices.

“To cool down the prices and to control the panic of shortages in the market, import duty for wheat should be reduced from 40% to say 5% and the government can import 5-6 MMT of wheat,” the report said. “However, to the extent possible, the landed cost should not be lower than MSP to ensure that farmers do get at least the MSP.”

It suggested building buffer stocks for volatile vegetable staples like tomatoes, onions and potatoes during the harvest season. The report also suggested boosting the processing sector, promoting substitutes for volatile vegetable products and increasing investments in the Research and Development sector.