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The Redundance of “Minimum Export Price”

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January 24, 2018

What is the issue?

  • The Commerce Ministry is working on a policy for promoting export of agriculture commodities.
  • It looks keen to do away with restrictions such as “Minimum Export Price (MEP)” for most of the export goods, except certain sensitive items.

How does MEP work?

  • MEP involves “fixing a floor price” below which an exporter shall not sell the product to an overseas customer.
  • Usually imposed on commodities such as “onion and basmati rice”, it hopes to restrict export volumes, curtail domestic prices and enhanc forex earnings.
  • While the government stipulates a MEP from time to time, in market parleys it is largely seen as an outdated concept as it gets easily circumvented.  
  • The system is duped easily by invoicing at or above MEP for the record but actually pricing and selling the good at prevailing market price.
  • Depending on the pre-agreed arrangements, the price differential is later adjusted through future transactions or quality claims.
  • With exporters having mastered this route, MEP has become an ineffective instrument to restrict commodity export or contain domestic price rise.

What is the alternative?

  • Rather than MEP, imposing an export duty could be an effective alternative, which will augment exchequer revenue and eliminate circumvention.
  • But it is the Finance Ministry, and not the Commerce Ministry, that will take the decision to impose or vary the rate of duty.
  • For such action, the Finance Ministry will have to consider all sensitivities relating to export of essential and politically touchy commodities like onion.
  • Also, it has to closely track market developments so as to be proactive in making ciritical decisions.

What is the larger picture?

  • For promoting export of agri-commodities, the country should produce ‘genuine export surplus’.
  • Barring a limited number of commodities such as basmati rice and cotton, there are not many commodities that are in real surplus here.
  • Hence, Agri export form India has often primarily been a play on currency, where a weaker rupee helps boost exports.
  • Hence, the Commerce Ministry’s new agri-export push should not be a standalone policy that merely tinkers with certain procedural aspects.
  • Rather, it must be all encompassing and provide a holistic solutions from farm to ship to enjoy sustained success.

 

Source: BusinessLine

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