Why is the minimum export price irrelevant?
The Ministry of Commerce is said to be working on a policy of promoting exports of agricultural products; and is keen to remove restrictions such as the minimum export price (MEP) for most export products, except for what he calls “sensitive” items.
Set a floor price
It is strange that the Udyog Bhawan Mandarins continue to cling to very outdated export restrictions such as MEP. The floor price is most often imposed on commodities such as onion, basmati rice and others with the vain hope that export volumes will be limited, the rise in domestic prices will be contained and more foreign exchange will be earned. .
From time to time, the government stipulates a minimum price below which an exporter must not sell the product to a foreign customer. The export invoice must be equal to or greater than the specified MEP. The intention is to ensure that Indian products are not “thrown” at low prices on the international market.
It is well known that the price restriction can be easily circumvented by resourceful exporters by fixing the price of the export product at the market rate, but being charged at or slightly more from the MEP for record purposes.
Over the years, exporters have consistently succeeded in beating the MEP rule. Depending on the relationship between Indian sellers and foreign buyers, the price difference is often settled by future transactions or quality claims etc.
Imposed by the Ministry of Commerce, the MEP is hardly an effective instrument to restrict exports of raw materials or contain the rise in domestic prices; and therefore, deserves to be deleted. So what is the alternative?
Imposing an export duty is an effective alternative. A tax levy is a sure way to increase the revenues of the chessboard; and there is no escape or discretion.
But it is the Ministry of Finance, and not the Ministry of Commerce, that will make the decision to impose or change the duty rate. The Ministry of Finance will have to take into account any sensitivity linked to the export of essential and politically sensitive products such as onions. In addition, he must be aware of market developments in order to be able to take proactive decisions.
Agricultural export policy
Above all, to promote the export of agricultural products, the country should produce a “real export surplus”. With the exception of a limited number of products such as basmati rice and cotton, there are not many products that are in real surplus for the overseas market.
Agricultural exports have often been a game of currency; a lower rupee helps boost exports.
The Commerce Ministry’s new agro-export push shouldn’t be a stand-alone ministry-centric policy that just tinkers with certain procedural aspects.
The promotion of agricultural exports should be conceived and viewed as a comprehensive policy that provides holistic solutions from farm to ship. Only then will the policy have lasting success.
Also, it is time to review the various foreign trade agreements. In the past, some of them were hastily adopted without adequate consultation with stakeholders. Imports under free trade agreements continue to hurt domestic producers. It is time to tighten them up, while working to make domestic products more competitive.
The author is a global specialist in the agro-industry and the commodities market. Opinions are personal.