Wrong data on wheat output led to faulty policy
Though many have criticised the government’s decision to eliminate import duties on wheat while raising those on steel—one hurts poor farmers, the criticism is, the other benefits fat-cat industrialists—this is missing the real scandal, of how the government kept putting out incorrect projections on wheat output and, naturally enough, coming out with wrong policies that aggravated the price situation. While the trade kept estimating 2016’s wheat output at around 82-83 million tonnes, the government kept insisting it was going to be around 92-93 million tonnes—whether this was done deliberately, to show higher agriculture growth in a drought year, is not clear.
Naturally, prices started hardening—from 1.7% in May 2015, all the way up to 5.6% in January 2016 and 10.3% in August—and, in response to the likely wheat output, imports also started rising. With the government blaming hoarding for prices hardening, the usual stock limits for private trade were cut and, by June, a hefty 25% import duty was also imposed on wheat imports. With the crop falling short, naturally enough, the government procurement agencies were able to only buy 23 million tonnes of wheat against the expected 28 million. Not surprisingly, wheat stock in the central pool—the higher the stock, the more wheat can be sold in the open market to depress prices—has fallen from 32.6 million tonnes in June 2016 to around 16.5 million today, and trade estimates are this will fall to a mere 6.5 million by April 2017.
Given its sad experience, the government would do well to relook the manner in which output data is calculated and put out and, instead of mistrusting markets and being quick to impose stocking limits, start reading market signals and using these to fashion appropriate policy responses—import duties on wheat should have been cut, not raised, and had the government been active in the futures market, it could have contracted wheat many months ago. Other import duties, such as the 70% on rice, also make little sense given how this is a water-intensive crop—lower duties would encourage imports and help save Punjab’s water-table, for instance.
Nor does it make sense to have, simultaneously, high import and export duties on sugar. While the policy of restricting the hikes in minimum support prices (MSPs) of cereals like wheat and rice are sensible from the point of view of inflation-control, the government needs to see if higher MSPs for pulses are causing a reduction in cereals’ output. In itself, that may not be a bad idea, but if cereals’ output is to be deliberately restricted, the import policy regime has to be appropriately structured—indeed, combined with a policy of restricting procurement by FCI and encouraging more trading in futures exchanges, the impact will be more beneficial.