Given the huge surplus, there is little option but to export wheat at a loss. Lowering ration shop prices will take care of this and also kill food inflation.
The ‘core inflation rate’ is relevant for those who neither eat nor use energy.
-Floyd Norris, New York Times
This is a sequel to two articles I wrote on the same topic over the last two years (April 1, 2007 and April 3, 2008). In both these articles, I talked about the expected crisis in wheat supplies. Now, for a change, I discuss the problem of plenty and a possible solution. I have written it rather early, before the commencement of the wheat marketing season in April, for three reasons. The earlier the recommendation is made, the better it is for its timely consideration by policymakers. Secondly, and more importantly, the code of conduct prescribed by the Election Commission will come into force some time in March. Hence there is some urgency in announcing a policy, friendly to the electorate, on the lines indicated later. Thirdly, its early announcement will have a desirable impact on wheat procurement in the next marketing season.
Production, Procurement and Stocks: The nation faces a paradoxical situation of plenty of supplies of both rice and wheat, the two most important staple food items, existing side by side with their high prices. The granaries of the Food Corporation of India (FCI) are full of stocks after record procurements of around 22 million tonnes for both wheat and rice. The central pool had 20.1 million tonnes and 16.7 million tonnes of rice and wheat, respectively, on February 1, 2009. It is estimated that the buffer stock of wheat on April 1, 2009 will be 99 lakh tonnes compared with the norm of 40 lakh tonnes. In addition, a strategic reserve of 30 lakh tonnes is also available. Similarly, it is estimated that the rice stock will be 65.9 lakh tonnes on October 1, 2009, the beginning of the rice season, as against the norm of 52 lakh tonnes. Wheat production in rabi 2008-2009 has been satisfactory. The Food and Agriculture Organization (FAO) and the United States Department of Agriculture (USDA) have indicated a record world output of wheat during 2008 with a good outlook for 2009.
Prices: There is considerable hype, both in official circles and the media, about the so-called decline in inflation. It is true that the rate of inflation, as reflected in the Wholesale Price Index (WPI), has come down remarkably in the recent weeks to less than 4 per cent today. There is even talk about the spectre of deflation looming ahead. There are analysts who point out the decline in the core inflation rate, after excluding food and energy prices. While this concept is understandable in developed countries, for India, the core of the inflation problem relates to food and energy. The annual price rise in food articles, according to the latest data even in WPI, is of the order of 10.4 per cent. It is 13.3 per cent and 5.3 per cent for rice and wheat, respectively. The double-digit rate for food articles has persisted for quite some time. Of course, the Consumer Price Index (CPI) tells us a different and harsher story altogether about the rate for all commodities as well as for wheat and rice. The inflation rate for all commodities was over 10 per cent in December 2008 and January 2009 for the different groups covered at a time when the weekly WPI showed a much lower figure.
At a recent seminar in Mumbai, I brought out these facts in a question and answer session following a lecture by a member of the Prime Minister’s Economic Advisory Council on the business outlook for 2009-10. I asked for the Council’s take on inflation and its explanation of the paradox referred to at the beginning of this article. He said that the declining trend in the WPI will get reflected in the CPI with a lag. He did not answer the second query.
More From This Section
Possible solution: The FCI has to make storage space available for the procurement in the next marketing season. Otherwise it will have to store the new stock in open spaces under tarpaulin sheets, as it did under similar circumstances in the past, leading to pilferage and spoilage during the monsoon. According to the Economic Survey 2007-08, the central issue prices per quintal of wheat and rice under the Targeted Public Distribution System (TPDS) in 2007-08 were Rs 415 and Rs 565, respectively, for Below Poverty Line (BPL) families; and Rs 610 and Rs 795, respectively, for Above Poverty Line (APL) families. However, the economic costs of wheat and rice were Rs 1,371.3 and Rs 1,572.6, respectively, after including procurement incidentals and distribution expenses. The economic costs would have gone up further since then. The government is considering the removal of the restriction on exports. But the current trend in wheat prices in international markets is one of decline. At the Chicago Board of Trade, wheat futures for May delivery fell to $ 5.305 per bushel recently against $13.495 on February 27, 2008 — a decline of around 60 per cent. The US Department of Agriculture says that export commitments for wheat since June are 25 per cent less than what they were a year earlier. This means that there may not be many takers for Indian exports unless the price is competitive. Thus it would be necessary to sell the wheat at a low price. It would entail a loss for the FCI. The price of $5.305 per bushel translates into Rs 955 per quintal ($1 = Rs 49). Thus exports will have to be subsidised.
Instead of paying a subsidy to foreign buyers, it will be preferable if the surplus stocks are sold to APL families in TPDS shops and cooperative consumer stores at a price now fixed for those in the BPL category. It may even be done through the scheme for home delivery of grains under the TPDS, now being tried on a pilot basis. The clearing of stocks will mean a saving in storage costs. Any subsidy involved in the proposal needs to be set against this saving and the loss due to storage in the open. It will have a dramatic effect on the price of not only wheat but all other foodgrain. In order to check the inflationary trend in the price of wheat, the government decided to allot 10 lakh tonnes of wheat to states for open commercial sale to bulk consumers through tender during October 2008 to February 2009. The results are not known.
The government has announced a support/procurement price of Rs 1,080 per quintal for wheat in the next season. With a fall in market prices due to the implementation of the above-mentioned proposal, the private sector is not likely to pay any price higher than the one in procurement. The FCI should have no problem in its procurement operation with a good crop. In fact, if a similar policy is adopted for rice also, after a cost-benefit calculus, as in the case of wheat, it would ring the death-knell for inflation at least till the elections are over. But the government may not like to take a risk ahead of the sowing season for rice. The proposal may not make much difference to the additional fiscal deficit as a percentage of GDP. In any case, the term has become a dirty thirteen-letter expression which no one wants to utter in the current context!
The author is a former Officer-in-Charge, Department of Economic Analysis and Policy, RBI