Modi must hold the line on food and fuel trade

By Andy Mukherjee

From dismantling its protectionist “inspector raj,” to cutting duties on Tesla Inc cars, and treating Amazon.com Inc and Walmart Inc on a par with domestic retailers, India is under pressure on many fronts in its trade talks with the US.

While concessions in several of these areas will be beneficial to Indians, the sticking points will be food and fuel.

Take ethanol blending in gasoline. New Delhi has, over the past quarter century, modelled its intercity transport network on America’s by centering it on highways, rather than rail. To manage the pollution from cars and trucks, and to reduce dependence on imported fossil fuels, the government has mandated the addition of 20 per cent bio-ethanol in gasoline.

But the program has a politically important third goal: Enhancing local farm income with the creation of a market in agricultural surplus and byproducts. This is where trade interests will collide. American farmers are allowed to sell corn-based ethanol to India for industrial use, but not for blending in transport fuel. Washington views this as an unfair nontariff barrier. Prime Minister Narendra Modi’s administration is reviewing a US request to lift the restrictions, Bloomberg News reported this month.

It’s easy to see why prizing open the fast-growing market for ethanol mixing may be important to President Donald Trump. In theory at least, estimated annual demand of 10 billion liters (2.6 billion gallons) is big enough to absorb all of the corn grown in Indiana. A big win in agriculture will help the US president at a time when his trade war has all but closed off the opportunity to export sorghum from Kansas and Texas to China, where it is used in feedstock and to make Baijiu liquor. American corn, too, will need new buyers in Asia as Chinese demand retreats.

Trump is threatening to scuttle India’s manufacturing ambitions. He has warned Apple Inc of a 25 per cent tariff if it assembles iPhones meant for sale in the US anywhere overseas. He has also damaged his friend Modi’s strongman image at home by repeatedly claiming to have been the peacemaker who engineered the ceasefire between India and Pakistan in their recent hostilities. New Delhi has no option except to be conciliatory; it must at least reach a preliminary deal to avoid the 26 per cent reciprocal tariff ahead of its July 9 deadline.

Yet, when it comes to food and fuel, the Modi government will have to proceed carefully.

Domestic sources of biofuels range from maize — what Americans call corn — to broken rice, rotten potatoes, sugarcane and molasses. These first-generation sources of ethanol achieve 30 per cent to 40 per cent reduction in carbon emissions. Homegrown clean-tech firms are investing billions of dollars in second-generation bio-ethanol. Hyderabad-based AM Green has acquired a Finnish technology company to extract green fuel and chemicals from bamboo, grass and bagasse, the pulp of crushed sugarcane stalks. Blending gasoline with 2G ethanol can cut CO2 by 90 per cent. The bigger advantage is that these fuel sources don’t compete with food.

That isn’t true of corn. Amid low global oil prices, there is no economic case for India to grow a new dependency on an imported fuel-mixer that will leave its own farmers earning less from crop residues. They will, in turn, want higher subsidies for their main produce. Politically, they’re too important a constituency for their demand to be ignored. Farmers in the country’s north are asking for legally guaranteed minimum prices. So far, the Modi administration has resisted the pressure, but caving in to Trump on ethanol could spawn fresh unease.

Washington is also pushing New Delhi to allow genetically modified food, especially corn and soybean, its two biggest farm exports by volume. India allowed GM cotton in more than 20 years ago. But that’s where it drew the line. Food security for 1.4 billion people is a strategic concern, and policymakers aren’t keen to let multinational seed companies be in control. Even a locally developed variant of mustard, which received its environment clearance three years ago, is stuck in a legal limbo.

Yet, here a concession may be in India’s own interest. The population has already been exposed to modified soybean and canola seeds via imported edible oils. Besides, China, the second-largest seed market after the US, has already laid down a clear roadmap for GM crops. Farmers’ organizations in India want to follow the same path. A boost to farm productivity may help lower urban factory workers’ inflation expectations by making food prices less volatile. That will keep a tighter lid on manufacturing wages without any drop in living standards. Assembling iPhones in India could become more competitive — even with the threat of Trump’s tariffs.