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Harish Damodaran

NEW DELHI, June 30

IT is a market that annually buys roughly 1.6 lakh tonnes (lt) of basmati rice from the country, valued at almost 100 million euros (Rs 525-530 crore). But with the European Union (EU) now deciding to virtually scrap the existing so-called Headnote 7 of its 1995 Offer on Agriculture— which confers concessional duty access to Indian basmati rice— this lucrative market seems to be under threat.

To understand what has actually happened, one needs know how the present rice import regime operates. The EU currently levies import duties on various types of rice based on an `intervention price' it declares for corresponding paddy grades, similar to the minimum support price here.

The intervention price for paddy is used to arrive at a `ceiling price' for husked (i.e. brown) rice, which is taken to be 180 per cent of the former in the case of long-grain rice, including basmati. The intervention price for long-grain paddy was till now fixed at 298 euros, which then translates into a ceiling price of about 536 euros for brown rice.

The final (`theoretical') duty that is payable is computed by taking the difference between the ceiling price and a world `reference price'. The latter is basically the prevailing price of the US rice in the EU (c.i.f. Rotterdam), estimated by taking the US commodity exchange quotations and adding to them the various commercial premiums and transport cost.

Considering that the reference price now is around 223 euros, the theoretical duty payable on long-grain brown rice works out to 313 euros. But there is a catch here. Under its commitment to the World Trade Organisation (WTO), the EU had also `bound' itself to a basic duty of 264 euros on brown rice. In the event of the theoretical duty being higher than the WTO-bound duty, the latter rate applies.

In other words, at existing intervention and reference prices, the actual duty payable on long-grain brown rice entering the EU market is 264 euros and not 313 euros. The question is: how does India benefit from this regime? The answer for this lies in the duty derogation of 250 euros that basmati rice enjoys, which, in effect, reduces its duty liability to only 14 euros (264 minus 250), against 264 euros for competing long-grain brown rice varieties such as `2473' from the US.

Thus, if the c.i.f price of 2473 rice is 223 euros, the corresponding final duty-paid price comes to 487 euros. On the other hand, basmati rice is much costlier, with c.i.f. prices of around 660 euros for traditional premium varieties and 480 euros for the crossed Pusa hybrid varieties. But after accounting for the lower effective duty of 14 euros, the final duty-paid price for basmati ranges between 495-675 euros, which makes its relatively affordable vis-a-vis inferior quality long-grain rice varieties such as 2473 or Thai Jasmine.

All this would, of course, not have been possible in the absence of the duty derogation facility under Headnote 7. The beneficiaries here have been both India and Pakistan. Headnote 7 has enabled India to boost its basmati rice exports to the EU from 50,000 tonnes in 1994 to about 1.6 lt this year, while the gain has been even more substantial for Pakistan - from a mere 4,200 tonnes to 80,000 tonnes. All this has come mainly at the expense of US long-grain rice, which attracts higher duty.

But what the EU has now done is, firstly, to halve the `intervention price' for long-grain paddy to 150 euros, which means that the corresponding `ceiling price' for brown rice becomes 270 euros. The theoretical duty payable on the basis of the reworked `ceiling price' and the reference price of 223 euros then comes to only 47 euros, which also reduces the final duty-paid price of US long-grain rice from 487 euros to only 270 euros.

This makes it substantially cheaper than basmati rice. Even if Headnote 7 were to continue, the 250 euro duty derogation has no value and the final duty-paid price for basmati rice would be 480-660 euros.

However, the EU has simultaneously dispensed with Headnote 7. Further, all brown rice entering the EU will uniformly attract the WTO-bound duty of 264 euros. All basmati exporters to the EU would henceforth have to cough up a duty of 264 euros, against 14 euros earlier. The country's main exporters to the EU are United Riceland Ltd (`Tilda' brand) and Picric Ltd (`Veetee'), who export roughly 70,000 tonnes and 30,000 tonnes respectively. Other exporters include Sunstar Exports, Bush Foods, Ameera Foods and Satnam Overseas Ltd.

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