Indian exports dropped for four consecutive months from August to November this year. In the first seven months of the current financial year, exports were down 1.99 per cent.

According to the Food and Agriculture Organisation, India has a potential to export agri products worth $97 billion (approximately Rs 7 lakh crore).

However, its total exports of these items (such as bananas, chicken meat, milk products, oranges etc) are a small fraction of that. For example in 2017, export of 19 agricultural commodities fetched $1.5 billion (Rs 10,700 crore).

Besides, India also has the capability to export value-added agricultural products such as wheat flour, soybean meal and processed foods of various hues. But the country has been unable to tap its export potential.

For long, various Indian governments have been wanting exports from the country to make up at least 2 per cent of total global exports. However, the target has never been realised.

In the first quarter of the current fiscal, Indian exports made up 1.71 per cent of total global exports against 1.58 per cent in the previous quarter.

One of the major reasons for Indian exports not making the desired headway is that shipments of agricultural products face many impediments. A primary reason for this is that prices of agricultural produce in India are ruling higher than the rates in global markets.

Let’s take for example, the price of wheat. For the Rabi marketing season starting April 2020, the Centre has fixed a minimum support price (MSP) of Rs 1,925 a quintal (100 kg) for wheat.

Wheat is grown as Rabi or winter crop which means sowing is done during November-December and harvest in late March-April. For the 2019 marketing season, wheat MSP was Rs 1,840 a quintal.

Indian wheat is treated as feed grade in the global market. Still, if someone were to make efforts to export this to, say a country like Indonesia, it will be quoted at a minimum price of $340 a tonne (Rs 2,425/quintal).

In contrast, wheat of comparable quality from Ukraine is quoted at less than $210 (Rs 1,500 a quintal). If a flour miller intends to export wheat products from India, how can he/she match the price offered by a competitor from Europe or even Australia?

The Centre has been fixing MSP mainly to ensure there is no distress sale by farmers. However, in order to maintain buffer stock to meet any food emergency, supply through ration shops (public distribution system) and to distribute for its various food-for-work schemes, the government procures wheat and rice.

At times, when domestic prices have crashed as in the case of groundnut, cotton, corn (maize) and arhar (pigeon pea), the government has stepped in to procure these commodities.

The MSP is meant to be for all farmers. But in the case of wheat or rice, the procurement seems to be mainly confined to Punjab and Haryana only.

For example, this year the Centre, through the Food Corporation of India (FCI), procured 34.13 million tonnes (mt) of wheat from various states. Of this, 12.9 mt were procured from Punjab and 9.3 mt from Haryana.

In contrast, procurement from Uttar Pradesh, the largest wheat producer in the country, was a meagre 3.4 mt. The issue here is that if MSP is to benefit all farmers, why is it that only a handful benefit, that too from a couple of states like Punjab and Haryana?

What happens is that in states such as Uttar Pradesh or Madhya Pradesh, private traders and trading firms buy these commodities at prices lower than MSP.

The wheat bought thus during peak arrivals is leveraged by them in the market at higher prices during off-season. The FCI also supplies wheat to industrial users such as flour millers through the open market sale scheme (OMSS).

However, it tends to add its interest burden on price of the product. For example, currently FCI offers wheat under OMSS at around Rs 2,200 a quintal ex-Punjab. If transport and other handling charges are added, the price at the gate of the industrial user will be at least Rs 2,750 a quintal.

There are other problems too, with regard to government policies on wheat and rice. For nearly two decades now, the issue price or the rate at which the Centre offers wheat, rice or other grains to the states has remained very low.

In turn, the states distribute the grains at Re 1 or Rs 2 a kg through ration shops under their social welfare schemes. However, this leads to diversion of these grains by unscrupulous elements.

For example, rice issued at Re 1/kg in Tamil Nadu is smuggled into Kerala.

Besides, there is also the problem of local taxes levied by the state governments that add to the costs of grains.

The FCI is also not exempt from these levies such as development fees, mandi cess etc totaling 11-13 per cent of the wheat MSP, thus adding to its financial burden.

Another example of MSP hurting producers of value-added products is soybean. The MSP for soybean for this year is Rs 3,710. Currently, it is quoted around Rs 4,200 in Indore markets, the hub of soybean trade.

In comparison, the soybean from the US is quoted at around $350/tonne (Rs 2,500/quintal). India does not allow import of oil seeds but the point here is how can someone wanting to export soybean oil or meal be competitive compared to other destinations, say Argentina?

Similarly, the MSP for maize (corn) this year has been fixed at 1,760. Its prices in Karnataka, for example, are ruling over Rs 1,800 in most markets.

In comparison, global corn prices are between $150 and $175 a tonne (Rs 10,70-1,250 a quintal). How can a producer of a corn product be competitive? Or for that matter, how can the poultry industry, the main consumer, manage exports with such high input prices.

In addition, exporters face the infrastructure bottlenecks, including high transport charges.

This is not to say that the Centre should not announce a support price for farmers. It is likely that sooner or later the MSP could be challenged in the World Trade Organisation (WTO) by some country that depends on imports since this is seen as a factor that distorts the market.

Second, how long can the government fix the MSP and go on increasing it without taking into consideration the prevailing global scenario? How much burden can the consumer shoulder in the name of MSP?

Also, the MSP is not helping all the farmers in the country uniformly. While farmers in the states that have a good procurement system gain, others in states that lack such a system have to settle for lower than MSP prices.

Various committees have looked into the MSP scheme and have come out with various suggestions. One way of getting away from the MSP scheme but also ensuring that farmers are not affected is by fixing benchmark prices (BMP).

The Centre can fix a BMP for various crops taking into consideration the same factors that go into fixing MSP. When prices drop below BMP, the Centre can compensate the farmers through the direct beneficiary system. The compensation can be the difference between the market price and the BMP.

The Centre also has to look at a way to encourage and reward productivity. The current MSP system doesn’t mark out a farmer whose productivity is higher than his neighbour.

What these measures can achieve are that one, farmers will get the BMP without the markets being distorted and two, the value-addition industry will also get products at prices on par with its competitors.

This will not only improve them to be competitive in the global market but will in the ultimate analysis help increase agricultural exports. That way, the economy, too, will gain as the current trade imbalance will be set right and trade deficit will shrink.