India is banning exports of some kinds of rice in response to rising domestic prices. Basmati rice will continue to be sent abroad, but other kinds of rice will be restricted. India is responsible for about 40 percent of global rice exports, and about half of that is non-basmati rice.
Rice prices in India have increased by about 12 percent in the past year. The increase is largely related to lackluster harvests. This is an El Niño year, which usually causes lower rainfall in Asia. Rice grows in wet conditions, so it hurts rice yields. Foreseeing this cyclical event, countries stockpile bumper crops to make up for it, but shortfalls have been worse than expected.
India has actually seen average rainfall so far this monsoon season, but it has been uneven. Some areas of the country have gotten excessive rain, and others haven’t gotten enough. That has hurt Indian rice production. Global production has been further hurt by flooding in Pakistan late last year, and other major producers such as Vietnam and Thailand are already at capacity.
India is less than a year away from its next general election in April–May 2024. The export ban is politically expedient for the government of Prime Minister Narendra Modi. Export bans can effectively reduce prices in the short term, and the short term will be enough to get through the election.
But export bans are not smart policy overall. Economist Alex Tabarrok explains why in a post for Marginal Revolution.
Export bans help consumers, but they hurt producers. “Moreover, producer surplus declines by more than consumer surplus rises so the net effect of the export ban is to reduce domestic welfare,” Tabarrok writes. He continues:
Rice producers in India are often small family farmers and the government tries to help these farmers with other policies like subsidies so the export ban goes against the grain of other government policy. Moreover, the decline in rice producer incomes will hurt rural incomes more generally. Thus, the export ban protects urban consumers at the expense of typically poorer rural farmers and is likely to increase inequality.
In the long run, an export ban means a smaller farm sector. An export ban is like prohibiting a hotel from raising prices during seasons of high demand. That’s nice if you can get a room but it means fewer hotels. In other words, more hotels will enter the market if they know that they can offset low profits in periods of low demand with high profits in periods of high demand. In the same way, preventing farmers from selling at high prices reduces farmer profits which reduces long run entry and production.
This is not a smart move for India’s long-run economic development. Urban-rural wealth divides are already a problem in India, with many urban dwellers approaching middle income, by global standards, while many rural dwellers are still very poor. India’s agricultural sector is still much too large as a share of its workforce, over 40 percent, for India to become a developed country. Indian farmers benefit from international exposure, and the government should want them to become more integrated with global markets. Rice traders said India’s ban will benefit other rice-exporting countries.
Poor countries in Africa and Asia that import rice will be most affected by India’s export ban. Governments in those countries are seeking special deals with the Indian government to circumvent the ban. India has said it is open to making such deals in cases where the ban threatens basic food availability. Basmati rice is more commonly exported to Western countries, so they will not be affected as much by the policy.
Politically motivated short-term thinking is a global phenomenon.