Plenty of gaps in food inflation control measures, complain industry bodies

They say some measures have spawned malpractices on the part of exporters, others have been partial to a certain section of traders

Alarmed by the sharp spike in retail inflation for April, which touched a near eight-year high of 7.79 per cent, the government announced a slew of measures in May to cool down prices, particularly those of food and fuel.

It first banned wheat exports, then exempted customs duty and the agri cess on import of 2 million tonnes of soybean and sunflower oil per year. Thereafter it capped sugar exports at 10 million tonnes and according to some reports, it is now even looking at curbing exports of wheat flour (atta) and other wheat items.

While these steps have had the requisite impact and prices of most food items have been declining since early June, the manner in which the decisions were implemented has roiled the industry with several players objectimg formally with the government.

“The regulations on exports and other measures, insulated domestic prices from the international spike, which is the reason why in several commodities such as edible oils and wheat, one can see a sharp correction in local rates, while international prices haven’t moderated by the same amount,” Food Secretary Sudhanshu Pandey told reporters in a recent press conference.

Wheat

In the case of wheat, the Centre suddenly ordered a ban on exports on May 13, but allowed those with valid irrevocable Letters of Credit (LCs) that are registered with the DGFT to continue shipments.

However, seeing a sharp spike in the number of fake LCs submitted by exporters (many of whom were fly-by-night operators), the Centre amended the requirements to make them stricter for exporters to ship wheat based on LCs.

Some traders said against export contracts of about 4.5 million tonnes of wheat before the ban came into force, LCs of about 5.5 million tonnes were submitted to the government for approval.

This meant that around one million tonnes were based on fake LCs.

Thereafter, on May 30, the Centre further tightened the noose on unscrupulous wheat exporters.

It said that a probe revealed that some exporters issued post-dated LCs, and that it would initiate proceedings against them under the Foreign Trade Act and could also take the help of CBI and EoW to nail such culprits.

The government said it would also take all necessary action against banks that are found complicit with exporters in issuing post-dated LCs.

The order further said that any Regional Authority that approves wheat exports against valid LCs must again send the contract for clearance by a two-member panel to be set up in DGFT at its Delhi headquarters.

On the day wheat exports were banned, official records show that India had contracted to export some 4.5 million tonnes of wheat of which 1.5 million tonnes had already been shipped by then.

In FY22 financial year, India had exported around 7.22 million tonnes of wheat, which was the highest ever.

The repeated change in the order and the conflicting statements on allowing limited exports even days after the exports were formally stopped confused traders and exporters alike, leaving the entire trade in a state of flux that took time to settle down.

Sugar

Both private and cooperative millers questioned the manner in which the government was distributing export release orders post the ban, though the Centre claimed it had been transparent.

The mills led by the Indian Sugar Mills Association (ISMA) wrote a letter to the government alleging that it has deviated from its earlier practice of granting export release orders only to sugar mills by including trading and export houses.

This has complicated the system and opened the doors for arbitrariness and manipulation, body said.

"These trading houses have cornered much of the export quotas granted after the ban and are now trying to manipulate the system and creating hurdles in smooth export of sugar," ISMA President Aditya Jhunjhunwala had told Business Standard.

Days before, cooperative sugar mills also complained of unfair treatment being meted out to them while allocating export quotas post the ban.

The cooperatives which have a share of about 45 per cent in the total sugar output of the country alleged that though almost 41 per cent of the total sugar exported in the last three seasons (i.e. 2019-20, 2020-21 and 2021-22 seasons) has come from the cooperative sector, they have been allocated just around 47 per cent of fresh export release orders.

Edible oil

The Solvent Extractors Association (SEA), the apex body of domestic oilseed processors, wrote to the government that there is a genuine fear of the Tariff Rate Quota (TRQ) of 2 million tonnes of soy and sunflower oil per annum at zero duty, disturbing the smooth supply chain of edible oils.

To buttress its point, SEA said that the TRQ system creates a dual-duty structure whereby TRQ will have nil duty and non-TRQ will suffer 5.5 per cent duty.

“This may result in restricting imports only to TRQ since other imports will be expensive and not commercially viable in the edible oil business, which operates at razor-thin margins,” it said.

SEA added that India annually imports 3.5-4 million tonnes of soybean oil against which a TRQ of 2 million tonnes has been allowed at nil duty.

There is a long lead time between a buying decision for soya or sunflower oil and its arrival in India which usually takes around three months.

As a result, once an importer has exhausted the TRQ he will not import under normal duty till other importers are having TRQ stocks.

“This could result in shortage in the country till imports under normal duty start arriving,” the memo highlighted.

In short, the industry body said that the intention of the government in introducing TRQ is to increase supply and help moderate prices in the country but it may end up squeezing imports.

“The actual effect of TRQ in the marketplace will only be felt after 2-3 months of its implementation,” the SEA said.

It added that in the intervening period prices have the potential to rise as ‘Festival Season’ in India starts shortly and consumption also goes up once rains set in. To have immediate impact it may be worthwhile to simply reduce duties on these oils across the board without any quota immediately to cool down prices

A simpler and easier way, according to SEA, would have been to reduce the import duty on soya and sunflower oil to zero for the time being till September instead of issuing TRQs.

“This would have had a salutary effect on domestic edible oil prices, while the government could have reviewed the situation in September and taken suitable calls based on kharif oilseeds production,” the industry body added.