Title: End Term Assignment for Project Report Groups Subject: Managerial Economics Batch: 2012-14 Word Count:

1948 Group Members: Sr.No. 1 2 3 4 Name NOORI GARG PARVATI SAMEER MOHAN RAHUL GHOSE ROHIT KRISHNA Roll. No. 2012194 2012202 2012228 2012248 Section: D Page Count: 5 Group No: 4

Rice exports may rise 15% as government scraps export floor price
Sutanuka Ghosal, ET Bureau Aug 14, 2012, 06.39AM IST

Kolkata: India's rice exports are likely to jump as much as 15% this year after the government scrapped theminimum export price (MEP) of $700 per tonne. "India's annual basmati exports will surpass last year's figure in the current fiscal," said Sumeet Saluja, managing director, Whitefields Overseas, which markets basmati under the brand name India Crown. Total rice shipments, including basmati and non-basmati, were 7.3 million tonne in 2011-12. Of this, 3.2 million tonne was of basmati and the rest 4.1 million tonne was of non-basmati. India is the world's second biggest rice producer and top basmati exporter. Traders said ending the MEP scheme would help exporters sell lower grades of basmati at prices below $700 a tonne. "At present, Indian basmati rice is getting nearly 20% premium over the last year and is being sold in the overseas market at a price varying between $1,100-$1,400 per tonne," said Saluja. However, Vijay Setia, former president of All-India Rice Exporters Association (AIREA), said: "Last year, farmers got paltry Rs 14-15 per kg for new paddy and Rs 30 per kg for old paddy. It was a bumper crop last year. This year, farmers are expected not to settle below Rs 24 -25 per kg for raw basmati paddy. Under these circumstances, I think there will be a drop in purchases by buyers. Indian exporters will be able to achieve last year's basmati exports of 3.2 million tonne." India produced a record 103 million tonne of rice in the 2011-12 crop year that ended in June, registering a jump of about 8% from the previous year. This included 5 million tonne of basmati. The country exports rice to West Asia, Europe, the United States and Latin American countries.

Source: Economic Times dated 14 Aug, 2012

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Impact of prices of rice Rice is a major staple food & is important for securing food for over half of the worlds population. Earlier the government had lowered the minimum export price (MEP) on basmati rice to USD 700 a ton from USD 900 a ton to make it more competitive in the global market. Currently, exporters of rice are selling basmati rice at an average price of USD 950 a ton in the overseas market, which is still way below the cost that exporters from other rice producing countries are offering. Since, the minimum export price has been scrapped off; the country has exported nearly 4.5 million tons of non-basmati rice, according to industry data. India ships the premium aromatic rice variety to Gulf countries including Saudi Arabia, Iran, Kuwait and Yemen. India, the second biggest rice producer, had harvested 103 .41 million tons of rice in the 2011-12 crop year. Shares in rice exporting firms soared on the back of a government decision to scrap the minimum export price (MEP) on Basmati rice. The move will improve the price competitiveness of Indian firms in overseas markets. Kohinoor Foods was up 11.4 per cent to Rs. 31.30, while REI Agro jumped 9.5 per cent to Rs. 10.95 on the BSE. KRBL and Chaman Lal Setia gained 8-9 per cent in a flat Mumbai market. LT Foods traded with over 7.5 per cent gains at Rs. 43. The world market of rice seems to be unstable and suffering from price fluctuation. Irregular climates, existence of disease, economic conditions of importer and exporter countries as well as irrelevant growth between production and consumption of rice may be regarded as the main reasons behind such instability. The level of vulnerability of the countries from these factors depends to the importance of rice in their foods. The case of rice is illuminating. Prices rose sharply in 2012 after record harvests in 2011 and indications of a higher production in 2012. Was the rise a "cost push" effect - due to the higher Minimum Support Price (MSP) for paddy fixed by the Government each year? Comparing the rise in retail prices with the rise in the price paid to the farmer should provide some answers. The MSP announced as the price per quintal of paddy has been converted into an effective price per kg of rice using the standard assumption that paddy will yield 67 per cent by weight rice on milling for comparison. (For example, the MSP of Rs 950/quintal fixed by the government for paddy for the 2009-2010 translates to an effective remuneration of Rs 14.18/kg rice to the farmer.) Elasticity Elasticity is the degree of responsiveness of demand to a change in its price. When the percentage change in price is greater than the percentage change in the quantity demanded, the demand is inelastic. While when the percentage change in price is less than the percentage change in quantity demanded its a case of elastic demand. For foreign Consumers, decrease in prices affects their consumption decisions to a large extent. Even a small decrease in the export price of rice greatly affects the consumption in this case.

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Fig 1: Elastic demand for Foreign Consumers From the figure we can see that the demand curve is flatter reflecting the elastic nature of demand. Government Intervention: As the news states that the government has scrapped the export floor price, it is an instance of government intervention in regulating the supply of rice in the international market. To protect the interests & demand of the domestic consumers for adequate consumption, the government usually sets a minimum support price in international market to dissuade the exporters from selling in international market. The high price acts a deterrent for Indian exporters to sell among the various sellers from other countries and also thereby reduces supplying low grade rice. Market Forces: With respect to the foreign importers, the scrapping of minimum export has become a strong incentive for demanding more quantity of rice. But as explained earlier, it has also simultaneously helped exporters in supplying more or capturing more of the market share by reaching the market equilibrium price. Production & Cost Analysis The maximum level of output that can be produced with a given amount of inputs is called Total Product. India is the worlds second biggest producer and top basmati exporter. India produced a record 103 million tonne of rice in the 2011-12 year that ended in June, registering a jump of about 8% from the previous year. So the total product is 103 million tonne for year 2011-12. The production function describes the maximum possible output that can be produced with given inputs. For this workers must be putting forth maximal effort. To ensure that workers are in fact working at full potential, the manager must institute an incentive structure that induces them to put forth the desired level of effort. So, Government has also conceptualized several schemes for the benefit of agrarian community. Some of these initiatives and programmes/ schemes are: Availability of high yielding variety of seeds. National Horticulture mission: The National Horticulture Mission is being implemented since the year 2005 with requisite backward and forward linkages and an end-to-end approach covering research, production, post-harvest management, processing and marketing. National Food Security Mission: With a view to enhance production of food grains to meet increasing demand on account of burgeoning population, National Food Security Mission (NFSM) is being implemented

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The traditional methods are still in use for harvesting rice. The fields are initially ploughed and then fertilizer is applied. The seeds are transplanted by hand and then through proper irrigation, the seeds are cultivated. Rice grows on a variety of soils like silts, loams and gravels. It can also tolerate alkaline as well as acid soils. However, clayey loam is well suited to the raising of this crop. Actually the clayey soil can be easily converted into mud in which rice seedlings can be transplanted easily. Proper care has to be taken as this crop thrives if the soil remains wet and is under water during its growing years. Rice fields should be level and should have low mud walls for retaining water. In the plain areas, excess rainwater is allowed to inundate the rice fields and flow slowly. This entire process can be done under agricultural expert guidance at free of cost.

Fig 2: Scale economies The above figure implies that due to scrapping of export floor price will help exporters sell lower grades of basmati that means expansion of output allows the exporter to produce at lower long run average cost as shown for outputs between 0 and Q*.This is known as economies of scale. Market Structure: Industries differ with respect to underlying structures, conduct and performances. A market can be considered to be perfectly competitive when it fulfills the following key conditions: 1. There are many buyers and sellers in the market, each of which is small related to the market; 2. Each firm is producing a homogeneous product i.e. there is little scope for differentiation in the consumer perception; 3. Buyers & sellers are having perfect information. 4. There is a free entry & exit from the market. 5. There are no transaction costs. The four key conditions mentioned above imply that no single firm can influence the price of the product. The fact that there are many small sellers, each selling an identical product, means that the consumers view the products of all sellers in the market as perfect substitutes. Because there is perfect competition, consumers know the quality & price of each sellers rice. These circumstances & the scrapping of export price make obvious that the market structure is an example of perfectly competitive market. And since it is a perfectly competitive market, the individual sellers demand curve is perfectly elastic reflects the fact that if the seller charges a price even slightly above the market equilibrium price, it would sell nothing. Thus, in a perfectly competitive market, the demand curve for an individual sellers

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product is simply market price and the sellers are price takers unlike the market structures such as monopoly, monopolistic competition and oligopoly where the sellers have some degree of control over the pricing decisions.

Fig 3: Demand at Market and Firm level under Perfect Competition So we can come to a conclusion that rice market in India is perfectly competitive. Being a perfectly competitive market, each individual seller does not have any scope of practicing price discrimination which is charging different price for different consumer. Effect of Price Flooring: Under these circumstances of removal of price flooring Indian exporters will be able to achieve last years basmati export of 3.2 million tonne. How? Price will not come down if MSP has been lowered or removed. We are above MSP because MSP was USD 900 per tonne latest and we are exporting at USD 1,100-1,400 per tonne. But sometimes it becomes a deterrent when the prices come to USD 800 per tonne, what do you do? If you export at a higher price, it is very difficult to do that because you have competition with Pakistan. So it is not that the price has been reduced by MSP but now we have at least maneuvering in the trade, now nothing will stop us exporting by whatever the prices will be, we will be doing it. Also removing MSP help exporters sell lower grades of basmati. References: www.google.com www.economictimes.com www.moneycontrol.com www.wikipedia.com Managerial economics & business strategy by Baye.M

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