IB ECONOMICS – INTERNAL ASSESSMENT

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Title of the article Why India's rice ban could trigger a global food crisis

BBC
Source of the
article https://www.bbc.com/news/world-asia-india-66360064

01.08.2023
Date the article
was written

28.11..2023
Date the
commentary was
written

770
Word count

(800 maximum)

Interdependence
Key concept being
used

Section of the
syllabus the article
relates to Section 1: Microeconomics

Section 2: Macroeconomics

Section 3: Global Economy: International Trade

On 20 July, India banned exports of non-basmati white rice in an attempt to calm rising domestic prices at
home. This was followed by reports and videos of panic buying and empty rice shelves at Indian grocery
stores in the US and Canada, driving up prices in the process.
There are thousands of varieties of rice that are grown and consumed, but four main groups are traded
globally. The slender long grain Indica rice comprises the bulk of the global trade, while the rest is made
up of fragrant or aromatic rice like basmati; the short-grained Japonica, used for sushi and risottos; and
glutinous or sticky rice, used for sweets.
India is the world's top rice exporter, accounting for some 40% of the global trade in the cereal. (Thailand,
Vietnam, Pakistan and the US are the other top exporters).
Among the major buyers of rice are China, the Philippines and Nigeria. There are "swing buyers" like
Indonesia and Bangladesh who step up imports when they have domestic supply shortages. Consumption
of rice is high and growing in Africa. In countries like Cuba and Panama it is the main source of energy.
Last year, India exported 22 million tonnes of rice to 140 countries. Of this, six million tonnes was the
relatively cheaper Indica white rice. (The estimated global trade in rice was 56 million tonnes.)

Indica white rice dominates around 70% of the global trade, and India has now ceased its export. This
comes on top of the country's ban last year of exports of broken rice and a 20% duty on non-basmati rice
exports.
Not surprisingly, July's export ban has sparked worries about runaway global rice prices. IMF chief
economist Pierre-Olivier Gourinchas reckons the ban would drive up prices and that global grain prices
could rise up to 15% this year.
Also, India's export ban has not come at a particularly propitious time, Shirley Mustafa, a rice market
analyst at the UN's Food and Agriculture Organisation (FAO) told me.
For one, global rice prices have been steadily rising since early 2022, with an increase of 14% since last
June.
Second, supplies are under strain, given that the arrival of the new crop in the markets is still about three
months away.
Inclement weather in South Asia - uneven monsoon rains in India and floods in Pakistan - has affected
supplies. Costs of growing rice have gone up because of a rise in prices of fertilisers.
The devaluation of currencies has led to increased import costs for numerous countries, while high
inflation has elevated borrowing costs of the trade.

India is the world's top rice exporter, accounting for some 40% of the global trade in the cereal
"We have a situation where importers are constrained. It remains to be seen whether these buyers will be
in a position to cope with further price increases," says Ms Mustafa.
India has a stockpile of an eye-popping 41 million tonnes of rice - more than three times the buffer
requirement - in public granaries for its strategic reserve and the Public Distribution System (PDS), which
gives more than 700 million poor people access to cheap food.
Over the past year, India has grappled with nagging food inflation - domestic rice prices have risen more
than 30% since last October - resulting in increased political pressure on the government ahead of general
elections next year. Also, with a host of state-level elections in the coming months, the escalating cost of
living poses a challenge to the government.
"I suspect that the action to ban non-basmati rice exports is largely precautionary and hopefully it will
prove temporary," Joseph Glauber of International Food Policy Research Institute (Ifpri) told me.
Devinder Sharma, an expert in agriculture policy in India, says that the government is trying to get ahead
of an anticipated production shortfall, with rice-growing regions in the south also exposed to risks of dry
rain as the El Nino weather pattern sweeps through later this year.
Many believe India should avoid rice export bans as they are detrimental to global food security.
More than half of the rice imports in around 42 countries originate from India, and in many African
nations, India's market share in rice imports surpasses 80%, according to Ifpri.
In top consuming countries in Asia - Bangladesh, Bhutan, Cambodia, Indonesia, Thailand and Sri Lanka,
for example - the share of rice consumption in total calorie intake a day ranges from 40% to 67%.

In many African nations, India's market share in rice imports surpasses 80%
"These bans hurt the vulnerable people most because they dedicate a larger share of their incomes to
buying food," says Ms Mustafa. "Rising prices could compel them to reduce the quantity of food they
consume or switch to alternatives that are not nutritionally good or cut expenses in other basic necessities
like housing and food." (To be sure, India's ban does permit some government shipments to countries on
the basis of food security.)
Food export bans are not new. Since last year's Russian invasion of Ukraine, the number of countries
imposing export restrictions on food has risen from from three to 16, according to Ifpri. Indonesia banned
palm oil exports; Argentina banned beef exports; and Turkey and Kyrgyzstan banned a range of grain
products. During the first four weeks of the Covid pandemic, some 21 countries implemented export
restrictions on a range of products.

But experts say India's export ban poses greater risks. It would "surely cause a spike in global prices of
white rice" and "adversely affect food security of many African nations", warn Ashok Gulati and Raya
Das of the Indian Council for Research on International Economic Relations (Icrier), a Delhi-based think
tank. They believe that in order for India to become a "responsible leader of the Global South in G-20", it
should avoid such abrupt bans. "But the bigger damage," they say, "will be that India will be seen as a
very unreliable supplier of rice."
 Commentary

India holds a 40% share of the rice export market, and they possess a borderline monopoly in the

market for rice exports. Hence when the country decided to ban the export of almost all rice

types except basmati, it created a supply shock all over the world leading to prices of grain by up

to 15%. This protectionist policy to ensure food security will neccecetize importers of rice to find

alternate sources like Vietnam. Due to the interdependence of countries created by

globalization, many countries specialize in a few fields and take support from others to meet

domestic needs. This interddependence of countries on one another for goods like rice due to some

countries like India having an absolute advantage in rice production.

(Fig.1)

The stoppage of rice exports from India has led to a shift inward in the supply curve (Sd-S2) of

many countries. This has led to them having to import rice at a higher price from other countries
since the demand for rice has not changed. This high dependence on India will now shift to a

higher dependence on other countries to supply rice. The effect of this can be seen in the increase

in the domestic price of the importing countries increasing by 15% (fig.1). The supply shock has

also put stress on other rice producers like Vietnam to meet the increased demand for rice from

their countries since they do not have benefits of economies of scale. This policy leads to lower

domestic prices (Indian), easing the rising food prices in the domestic economy, and allowing

low-income households to afford rice in the domestic market. The Indian government, however,

loses its revenue generated from the 20% duty imposed on the export placed some time previous

to this ban. However, in the long run, this may be the best choice for the Indian government as

lower food prices and a more stable food supply will mean that the overall confidence in the

economy will increase as well, which could lead to greater investment and long-run economic

output.

(Fig.2)
The import-heavy economies for rice will be forced to compensate for the higher food prices to

mitigate the impact on consumers. To do this, the governments of these contries can issue a

subsidy for importing firms, leading the supply curve to shift back outward, and reducing prices.

It is unlikely that subsidies can cover the entire brunt of the cost hike since the quantity of rice

imported is extremely high and consumers will have to bear some of the impact from higher

prices. The foreign consumers, although at a net loss in this economic exchange (since subsidies

will likely not cover the entirety of the price gap), mitigate the consequences of the supply shock.

The domestic supply of India, however unlike foreign markets, sees a shift outward in the

domestic supply curve, similar to as shown in the diagram above (fig.2). Due to high

interdependence and supply chain restrictions, a subsidy may not produce effects immediately

since suppliers will have to find alternate sources first. There is also a time lag with

implementation of implementic subsidies in the form of bureaucratic procedures, so some

damage will already be done. Subsidies also take away government revenue, hence this will be

beneficial in the long term, if the revenue can be recouped and the time taken to find alternate

sources and stabilise prices of rice will determine the effectiveness of such a policy.

The Indian economy benefited from this policy and has led to a greater level of stability. The

economies of other rice exporting countries like Vietnam also benefited due to the higher

revenue generated by both the governments of the countries as well as farmers who make more

money from selling rice. The losers of this economic transaction are the importers of rice since

they have to pay higher prices due to the high levels of dependence on India for their rice supply.

The countries depended on the grain from other countries after the supply shock created by the

start of the Russia-Ukraine war, but they now face a similar situation where the resource has

become even more scarce in the market and hence food shortages and insecurity may ensue.
Hence the ban is beneficial to the Indian economy in both the long and short run, but leads to

instability in food prices in other countries. Importing countries will benefit in the short run with

the introduction of a subsidy, and it will only be beneficial in the long run if the

interdependence and supply chain issues do not arise.