In today’s Finshots, we explain what could have prompted India to impose a sudden ban on rice exports and its global repercussions.

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The Story

You’ve probably seen videos by now — Indians in America are rushing to department stores to get their hands on sacks of rice. They’re pulling them off the shelves as fast as they can. And stores are apparently doubling prices and even putting up signs saying “Only 1 rice bag per family.”

It’s mayhem.

But what’s going on here?

Well, India has banned the export of regular white rice or the non-Basmati type. We’re worried about inflation. Because in the past year, domestic rice prices have already risen by over 11%.

And things might get worse. All thanks to the erratic weather conditions the country is experiencing.

See, rice is primarily a kharif crop. Farmers begin sowing during the first onset of the monsoon and they’re quite dependent on the rain gods for a bountiful harvest. But what they want is average rainfall. Not unpredictable showers.

But unfortunately, that seems to be the story this year.

On the one hand, we have excessive rainfall in the northern and northwestern states. These heavy rains have already damaged rice crops in Punjab and Himachal Pradesh. And on the other hand, eastern and southern states are still waiting for the rains which are 30% below average. Farmers have delayed planting the crop in places like West Bengal and Telangana.

So our rice output is getting hammered. That alone could increase the price of rice.

But there’s one more thing. Maybe if it was just a problem with rice prices, the government might have looked the other way.

The problem here is that prices of pretty much everything else in the consumption basket are also causing discomfort — vegetable prices are soaring anywhere between 25–100% in the past month. Fruits are also getting costlier at a fast clip.

And to make matters worse, we’re running into trouble with another staple grain — wheat.

Our harvest this year is already a fair bit lower than what the government hoped for. And prices have risen by 10% in the past couple of months. The government is even imposing limits on how much wheat traders can hold. And it’s the first time in 15 years that something like that is happening. Add to it the fact that Russia has again attacked some Ukrainian ports and backed out of a deal to allow wheat exports and you can see why global prices are also inching north. If things take a turn for the worse, we might even soon have to import wheat at higher prices.

That means the common folk can’t catch a break either. This food inflation could end up hurting them really badly. They might cut back on consumption activities. They might tighten their purse strings. And this could have an adverse effect on the economy.

So yeah, you can see why the government decided to ban rice exports.

But our ban also has a ripple effect across the globe.

And that’s because India is a pretty big rice exporter. We contribute to 40% of the global rice exports. Overnight, all of this vanishes. And we say overnight because this could affect nearly $1 billion worth of global rice contracts currently in place. We will have to cancel them.

That could push prices higher by another $100 per metric tonne. And mind you, in the past year, the price of rice has already risen from $400 to $500 per metric tonne. So if this does happen, people will be battling a 50% price rise in a year.

You can imagine that it will cause a big dent in the monthly budgets of many lower-income folks who’re dependent on the grain.

Now India has said that they’ll still allow for some exports. That is if a country reaches out and convinces us about their food security concerns. But it may still not offer respite to global prices.

It’s quite a problem.

And the thing is…there’s a sense of deja vu about all this.

What are we talking about, you ask?

Well, this isn’t the first time India has halted rice exports. Back in October 2007, we’d turned the tap off when we imposed a similar ban on rice exports. We were worried about inflation back then too. And our decision wreaked quite a bit of havoc. Because when we stopped exports, even others resorted to something similar.

Early in 2008, Egypt, Pakistan and Vietnam all started limiting the amount of rice that they would export. Government officials in Thailand, the world’s leading rice exporter, started talking about setting up a cartel of rice exporters, similar to OPEC. That, in turn, put the squeeze on countries like the Philippines, which don’t grow enough rice for their own consumption. They need to buy rice from abroad. Panicked government officials in the Philippines went on TV to tell people to eat less rice. That, of course, convinced people to go out and buy even more. Prices surged again.

It was a vicious cycle that created food security problems for a long time.

The worry is that it will happen again. Especially with most countries battling high food inflation.

So the only question is — is India overreacting here by imposing a blanket ban?

Some people think so. Ashok Gulati, an agricultural economist, says that we have stowed away 3 times more rice than what the buffer stock mandates. And as per data from the Food Corporation of India, our rice buffers do seem to have grown quite healthily. We really don’t seem to be in any danger.

But hey, you never know, right? Maybe we’re right to play it safe here. Because last year, we overestimated how much wheat we could produce. We were talking about exporting the surplus. And we guys even wrote a story asking if India could become a wheat exporting superpower. Next thing you know, the estimates failed. And we actually banned exports.

So yeah, maybe we don’t want to run the risk of something blindsiding us this time. We’re just looking out for ourselves and trying to ensure that we can keep prices in check. And that’s a good thing right?

Until then…

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