India's wheat crisis PDF Print E-mail
Tuesday, 19 May 2015 05:05
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At today’s prices, imports cost less than Indian grain


Imagine the irony. India has 34 million tonnes of wheat stocks with the Food Corporation of India (FCI) already and another 3-4 million will get added to this by July 1, but the country is still importing wheat, albeit in very small quantities. By July 1, FCI’s wheat and rice stocks will cross 60 million tonnes as compared to the buffer stock norm of 42 million—and even this is way too high—which translates into an extra cost of around R45,000 crore. Imagine what such funds could do for India’s irrigation sector! Given the plunge in global prices—by over $100 per tonne over the last one year—it is actually cheaper to import grain into India, at least in coastal regions, than it is to buy it from either FCI or from the open market where prices are determined by the minimum support price (MSP) paid by FCI (a mark-up of around 50% has to be added to this to take care of FCI’s procurement incidentals).

There are various problems that arise. Since the current procurement of around 25 million tonnes of wheat by FCI has been damaged due to the unseasonal rain, it is not clear how much of this can be distributed through ration shops—if it has to be exported as cattle feed, this will also add considerably to FCI’s costs. From the longer point of view, it is clear the current system of annual hikes in MSP cannot sustain, and the government will have to keep the hikes to the minimum. That, in turn, gives Rahul Gandhi plenty of fodder to attack the government with, more so since he will keep talking of the MSP hikes given by the Congress when it was in power.

This, of course, is the reason why the government needs to, as quickly as possible, move away from the current physical ration-driven policy to direct cash transfers where it will no longer need huge wheat and rice stocks. This will then free up valuable cash which can then be used to, in the initial years, give direct subsidies to either encourage farmers to grow other crops—if the government keeps 10 million tonnes of buffer as recommended by the Shanta Kumar committee, that frees up roughly R1.25 lakh crore to be used as direct subsidies or for creating fresh irrigation facilities. It is equally important to link India’s food procurement to a more sensible exports policy. A year ago, had FCI sold its stock to exporters—even after its 50% markup—considerable exports could have been made.

Indeed, one of the reasons behind the overall fall in India’s exports in FY15 was the 9% fall in agricultural exports. Had wheat exports taken place, India could easily have netted $5-7 billion extra. Till even a few months ago, had FCI sold its wheat at R15 per kg at the ports instead of ex-Punjab, exports could have been feasible—it is ironical FCI didn’t do this since the transport costs it would have incurred would have been lower than what it spends on storage each year. Since wheat—and rice—prices are typically lower than the MSP in states where FCI does not buy wheat, it is also true that FCI operations have hit India’s export potential. That’s something the government needs to factor in while formulating its agriculture strategy.


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