Export Tax On Rice Can Be Counter-Productive

India’s rice exports touched 10 million tonnes (mt) in 2011-12, while major rice-exporting nations - Vietnam and Thailand - have trailed with 7 mt and 6.5 mt respectively. The reasons: Free trading environment in India since last year, a price advantage and Thailand’s policy aberration. Short-term uncertainty on continuation of India’s export programme also prompted buyers to source 10-15 per cent more tonnage from India.
These elements are pivotal to India’s success story. But prospects of maintaining the same tempo appear doubtful in 2012-13.
Policymakers have recently suggested imposition of export tax of 5-7.5 per cent on rice for partial recovery of loss of precious water consumed in paddy production and hidden subsidy in power utilised for irrigation. (Moisture content of rice is 13-14 per cent maximum, but paddy is highly water-intensive).
Conservation of water and energy has economic and ecological merits and must be tackled on a priority basis, but regulating them through the tariff route may not be the right way forward.
The broad-break up of India’s 10 mt export is - basmati 2 mt; non-basmati 7 mt; 1121 rice variety to Iran 1 mt. Price of basmati and 1121 rice ranges from $1000-$1600 f.o.b/tonne. Export duty of, say, 7 per cent works out $70-112/tonne. Non-basmati variety is valued between $380 and $450 f.o.b/tonne and corresponding duty component will be $27-32/tonne.
Export tax may provoke traders to under-invoice to their overseas subsidiaries for marginalising duty and re-billing to the buyers. Discounted prices may also be contracted with understanding of appropriate adjustments. Even $10-15/tonne difference on 10,000 tonne cargo benefits buyers by $100,000-150000 (or Rs 55-80 lakh) or 1-1.5 per cent of f.o.b value. And this is not a trivial amount. Average margin in commodity trade does not exceed 2 per cent in best cases.
Official exports will reflect lower net realisation and encourage circular flow of money through alternative channels. If export duty is levied, millers and MNCs will be tempted to tie up with exporters having subsidiary companies in Dubai, Singapore or elsewhere.
Alternatively, if direct duty @ $25-30/tonne is applied for non-basmati and @ $50-80/tonne for basmati, it may induce manipulative declaration of basmati as non-basmati, and accounting jugglery. Why invent abuse-prone policies that will put both trade and Government agencies in disrepute?
India’s export buoyancy of 2011-12 is largely attributed to “Thai aberration” which may be corrected in 2012-13. Commercially, Thai white rice price of $555/tonne f.o.b is unviable for export by $100/tonne and that too because of cheaper inward flow of paddy from Cambodia and Vietnam.
Thailand ‘s annual production is 21 mt. As of November 2012, it is carrying overpriced ballooning stocks of 14 mt of rice (at $780-$800/tonne) — 67 per cent of yearly output — which are creating intense “holding” pressure on Thai Government. The balloon has to burst.
The only way of liquidating this massive stockpiling would be to align prices closer to Indian and Vietnam quotes or abandon the present format of pledging scheme. Net effect: Thai Government will have to release the discounted paddy sooner than later. This will flood the market and that is when Indian rice exports will be hit.
Iran, the major importer of 1121 basmati rice, is seeing continuous devaluation in its currency. Iranian imports will be automatically rationed in the coming months both due to payment defaults and higher landed prices.
Nigeria is flush with excess stocks imported before July to take advantage of duty increase from 30-50 per cent and now from 50-100 per cent from January 2013. About 1.5 mt of excess rice have been shipped and stored in Nigeria on speculation of import duty. Future demand from Nigeria will be subdued. Of late, Pakistan and Myanmar are shipping 25 per cent broken rice at $10/tonne less than Indian offers through MNCs to West Africa.
One year’s good performance of India’s rice exports cannot be taken to mean that this is here to stay. Export momentum can be restrained in the coming months. Assuming the continuation of the current conditions (including the Thai aberration), rice exports may not exceed 7-7.5 mt next year. Should Thailand apply a “correction”, exports may dip to 5 mt.
Weather, politics and currency movements all over the world are grey areas. Markets swing from one extreme to another. In the unpredictable bureaucratic and political set up, modifying or withdrawing even modest duty of 5-7 per cent when Indian prices are non-responsive, will be difficult and time-consuming.
Rice shipments from open market can be allowed, free from any export tax. There has been no “rice inflation” despite exporting 10 mt. Rice inventories with the Government agencies are rising; all exports are from privately-held inventories.

Exports are generating economic activity and helping farmers, where central/state procurement is lagging or lacking. Conservation of water and energy may be encouraged by reviewing wheat-rice centric production and procurement policies both at the Central and State level. 

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