Recent Government Moves on Import Duty on Wheat

In this article, we try to explain the significance of hiking import duties to safeguard the interest of Indian farmers in the light of the wheat prices falling due to high production and imports.  Import duty is basically a tax collected on imports and can be either fixed or based on the value of the goods {ad valorem} that are imported. Import duties, depending upon the context, can also be referred to as customs duty, import tariff or import tax.

The Recent Government Decision

On 8th December 2016, government decided to cut the import duty on wheat from 10% to 0%. This duty was 25% till September 2016. It was supposedly a “good thing” done by the Government because this move would benefit the interests of the consumers. However, it came under attack from various directions, most prominently from the All India Kisan Sabha (AIKS), who were not only anguished by this “detrimental” step but demanded that the Government should have hiked the import duty on wheat to 40%. The wheat traders in the country were reportedly expecting more than 5Mn Tonnes import this year which would result in crashing the wheat market in the country as the cost of imported wheat would be far below the Minimum Support Price (MSP). The Government had, on numerous occasions in the past, failed to procure wheat at MSP and without the presence of adequate open purchasing centers the farmers feared heavy losses as the Government does not have any effective procurement system. This worried the farmers to a great extent as, in the end, they might have to make distress sale, forced to sell their produce at lower prices.

2017 – Government hints at imposing wheat import duty

Imposing import duty has two distinct goals –

• It helps in raising income for the local Government
• It also helps in giving the market an advantage towards the locally produced goods which are subject to import duties

Besides import duties also decrease a country’s foreign dependency and would not hamper its self-sufficiency and matters of food security. Importing cheap agricultural produce means that domestic farmers will not get fair price for their produce.

In addition to the above points, the domestic wheat prices have been falling owing to higher production and imports. Ever since Government removed wheat import duties, 5.5Mn Tonnes of wheat were imported. And given the fact that there is no proper MSP-linked guaranteed procurement system by Government agencies like Food Corporation of India (FCI), it does not come off as much of a surprise when Food Minister Ram Vilas Paswan has been giving us hints about the possibility of reinstating wheat import duties to protect the interest of the farmers.

As per official reports, the Government is planning to review its decision keeping in mind the expectation of a record harvest this yr and to be certain that duty-free imports don’t affect local wheat prices. They will also take necessary measures to ensure that the farmers get MSP this time.

In the latest Government estimates, released on 15^th February 2017, the Agricultural Ministry’s wheat estimates stands at 92.3Mn Tonnes and shows a projection of  production of wheat at a record 96.6Mn Tonnes for the yr 2016-17. The projection shows a significant fall in the production of wheat from 94Mn Tonnes in May 2016.

The Ministry has also set a target of procuring a record 33Mn Tonnes from the domestic farmers which will begin from the new harvest season starting from April 2017. This target is comparatively higher than that of 28Mn Tonnes last yr which ultimately fell short by about 5Mn Tonnes.

In the current scenario, even though raising the import duty may not seem like a bad idea, the Government is still left with examining its own role which led to such sad state of affairs. Last yr when the traders were expecting a production of around 82-83Mn Tonnes owing to drought, the Government stood firm with its projection which showed the output to be 10Mn Tonnes higher.

Reinstating the import duty on wheat would turn out to be a good move in the favor of the Indian farmers mostly because of the following reasons –

• Farmers would be ensured of receiving the MSP for the increased production this year.
• The decision will encourage those farmers who were less likely to continue cultivating wheat because of duty-free wheat imports
• Imposing import duty will mean that prices of imported wheat will go up, which will help the domestic farmers as the traders will opt for the cheaper production
• Profits earned from this year’s production will help them in buying seeds and other raw materials for next year’s produce

Conclusion

Considering the points discussed above, if we try to come up with an alternative long-term solution we can see that a much better fit for this scenario would be to permit futures trading to smoothen price fluctuations in the market because this abrupt change in import duties may not be enough to contain the falling prices of wheat in the domestic market. A futures market, a properly functional one, will furnish accurate price fluctuation signals and imports can be made based on these signals in advance. But this can only work if the current export policies and the sudden changes in the import duties are ceased.

The decision that the Government came up with is rather a short-term one which “if” implemented properly will surely benefit the farmers. The word “if” has been very cautiously used here as a lot depends on factors like procurement system of the government and controlling the MSP.

In conclusion, it can be said that only time will reveal whether the Government opts for a long-term fix to the situation or a short-term reform.