Rising wheat prices also have a subsidy aspect, thanks to open market sales

Wheat prices have once again soared to almost Rs 3,300 per quintal in Delhi markets after a temporary drop in November. The November drop was largely due to pressure of open market sales by the Food Corporation of India (FCI). 

 

According to traders, the price spike this time could last a little longer as the Centre’s ability to intervene in the market through open market sales might get squeezed due to dwindling stocks. Also, wheat MSP, coupled with bonuses by several north Indian states, has ensured that the cost of purchasing wheat is higher, which in turn is contributing to food inflation. 

 

In FY24, India had released around 10 million tonnes (MT) of wheat from its inventories to cool prices. However, that number is significantly lower at just around 2.5 MT allocated for open sales in November this fiscal (FY25).  

 

Also, unlike last fiscal, the price impact of the open sales of wheat has been limited this year. Trade sources said that since the first tender for open sales issued in November 2024 to the last one issued just a few days back, wheat prices in the open markets have risen by almost Rs 240 per quintal in most markets. 

 

This means that despite Centre pumping in wheat in the open market from its own inventories, prices have not cooled much. 

 

“They instead have risen in the markets,” a large trader based out of Delhi said on condition of anonymity. 

 

He said the primary reason for the rise in prices despite liquidation of stocks is that the market is hungry for wheat and there are low pipeline stocks with flour millers and biscuit-makers. 

 

This is despite the fact that wheat production in the 2023-24 crop year that ended in July reached an all-time high of 113.29 MT, up 2.47 per cent from the previous year. 

 

Wheat stocks in state warehouses, however, totalled 20.6 MT at the start of December, slightly higher than the previous year's 19.2 MT, but far below five-year average of 29.5 MT. 

 

The Centre had fixed a reserve price for wheat under Open Market Sale Scheme (OMSS) at Rs 2,325 per quintal for fair and average quality (FAQ) grain and Rs 2,300 per quintal for URS (Under Reduced Specifications) grain. 

 

However, traders said the price fetched at the auctions is much higher than the reserve price which is also reflective of the demand for the commodity in the market. 

 

Across tenders floated (so far 0.5 MT of the allocated 2.5 MT has been offered for sale, of which around 0.48 MT has been lifted), the price quoted is significantly higher than the base rate. 

 

In fact, in no centre where the tenders were opened has the wheat price quoted by traders been close to the reserve price of Rs 2325 a quintal. 

 

Sources said the price increase is also on account of the fact that traders are holding on to large quantities of wheat in anticipation of more price hikes in the months going forward. 

 

“The declared stocks show that the downstream industry is well-stocked, therefore the whole price spike is mostly sentimental, as per my understanding,” a leading wheat trader said. He declined to be identified. 

 

In all this, the Centre is caught between a rock and a hard place. On the one hand, it is feeling the heat of rising wheat prices in the retail markets via inflation; on the other, its finances are getting stretched due to free distribution of the same wheat and rice to almost 80 crore Indians as part of the extended Pradhan Mantri Gareeb Kalyan Ann Yojana (PMGKAY).  

 

Now, following the latest extension, free foodgrain will continue to be distributed to all the 80 crore beneficiaries for the next five years starting FY24. 

 

The latest data from the Controller and Auditor General of India (CAG) shows that till November 2024, India has spent around 74 per cent of its FY-25 Budget Estimates (BE) for food subsidy totalling Rs 2.05 trillion, up from 58 per cent of the BE for the same period in the previous financial year. 

 

Assuming the same pace of spending is maintained in the remaining three months of FY25, this could mean that food subsidy could overshoot the BE by at least Rs 20,000-25,000 crore. 

 

But the bigger culprit than wheat in the subsidy dynamic is rice. As of December 1, 2024, total foodgrains stocks (including unmilled paddy held by millers) is estimated at 72.15 MT, while in the same period of FY24, the total central pool stocks were 62.74 MT. 

 

Within this, rice stocks are at around 28.02 MT (in addition to this, paddy equivalent to around 23.53 MT rice is with millers), while during the same period last year, total rice stocks were around 18.35 MT (in addition, unmilled paddy equivalent to around 25.20 MT of rice was with millers then). 

 

In contrast, wheat stocks in the central pool as on December 1, 2024 was around 20.6 MT, marginally higher than 19.9 MT last year. This means that not only was the government was holding higher foodgrains stocks, it was also at a higher cost to the exchequer. 

 

The budgeted economic cost of rice in FY25 is Rs 39.75 per kg while that of wheat is Rs 27.74 per kg. Against this, the total income from sale of foodgrains through PDS is zero as the grains have been made free. 

 

While it is no one’s case that the Centre used to earn large amounts from the sale of grains through PDS as the issue price (which is the rate at which the grains are sold) was unchanged for wheat at Rs 2 per kg, rice at Rs 3 per kg and coarse grains at Rs 1 per kg, but whatever little was being earned has now gone to zero. 

 

To change this, most experts said that one option could be to raise the Central Issue Price for some segments of the beneficiaries or restrict the expansion of beneficiaries strictly to those who need it badly. The savings through this could also be used to expand the basket of commodities offered through PDS and include more nutritious pulses and millets instead of just wheat and rice, as is the case now. 

 

The argument is that when poverty has – as per most recent literature and studies based on established data – declined, giving free food to almost 800 million of the 1.4 billion population defies logic. 

 

According to the State Bank of India (SBI), India's poverty rate in 2022-23 was 4.5–5 per cent. It said that rural poverty was 7.2 per cent, down from 25.7 per cent in 2011–12 while urban poverty dropped by 4.6 per cent from a decade ago. The SBI report attributed the decline to government programmes and increased spending. The new poverty line for rural areas is Rs 1,622 and Rs 1,929 for urban areas. 

 

As per NITI Aayog, India's multidimensional poverty also declined from 29.17 per cent in 2013–14 to 11.28 per cent in 2022–23, which is a decline of almost 18 percentage points. It said that almost 250 million people have moved out of poverty between 2013-14 and 2022-23. 

 

However, a World Bank report from October 2024 says that 129 million Indians continue to live in extreme poverty, earning less than $2.15 per day. The World Bank's poverty threshold is $6.85 income per day.