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| A Seshan: Coping with the wheat crisis | | The price of below-cost sales of FCI wheat stock has to be juxtaposed with the relief in inflation |
| A Seshan / Apr 17, 2010, 00:25 IST |
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On the eve of the marketing season (April-June) in 2007, 2008 and 2009, I wrote about the crisis facing the government in production, procurement and price of wheat. The current year is a continuation of the last year’s trend of surplus that carries its own problems. There has been no let-up in the price increases of wheat and rice, the two most important cereals of the country. Their prices were higher by 11.2 per cent and 10.7 per cent, respectively, over a year, going by the index number of wholesale prices (March 20), which is the official barometer for measuring inflation and policy making. The more reliable consumer price indices of various types have shown much higher rates of inflation existing side by side with the burgeoning buffer stocks of the Food Corporation of India (FCI).
Production, procurement and storage
The official projections for this year’s wheat crop production and procurement are 80 million tonnes (mt) and 26 mt, respectively. As on September 1, 2009, FCI had a covered storage capacity of 25 mt. Cover and Plinth (CAP) storage amounted to 2.73 mt. Besides, there are warehouses in areas where some state governments undertake procurement. As on March 1, the buffer stocks amounted to 18 mt of wheat and 26.95 mt of rice against the norm of 11.9 mt and 16.2 mt, respectively. In addition, a strategic reserve of 3 mt is also available. The offtake of wheat and rice from the public distribution system in March would have provided only a marginal relief to the storage problem by April 1.
According to the Food and Agriculture Organisation (FAO), although global wheat output is likely to decline sharply this year because of lower acreage, the supply is expected to be stable with strong stockpiles.
BANK CREDIT
Commercial bank advances against commodities (Rs crore) |
| |
2005 |
2006 |
2007 |
2008 |
2009 |
| Paddy/Rice |
3,806 |
5,676 |
7,368 |
9,603 |
9,640 |
| Wheat |
893 |
1,243 |
1,320 |
1,362 |
1,593 |
| Others* |
1,528 |
794 |
968 |
987 |
1,327 |
| Pulses |
431 |
533 |
757 |
879 |
941 |
| Sugar |
3,118 |
4,083 |
6,882 |
8,108 |
8,311 |
| Cotton |
3,068 |
3,950 |
4,220 |
5,095 |
6,415 |
| Total |
16,144 |
20,597 |
26,430 |
31,401 |
33,421 |
Data relate to end-October position. Only important commodities are listed.
* Other coarse cereals like jowar.
Source: Reserve Bank of India, obtained under the Right to Information Act. |
The global wheat stocks are projected to soar by 28 per cent to around 183.5 million metric tonnes by June 2010 as against last two years’ stock levels. According to the International Grain Council, export price of Hard Red Winter Wheat of the US was $197 per tonne (free on board) on April 2, against $254 a year ago, a decline of 22 per cent. It would be uneconomical to export wheat, and the foreign buyer may drive a hard bargain since the 1-2 year-old-stocks of wheat could be used only as feed grain for cattle.
Government efforts in open-market sales in the last few months have not helped in disgorging the stocks due to the above-market prices quoted. There should be a cost-benefit calculus of the expenditure incurred by the government in maintaining the excessive stocks (including the spoilage of grain) and the additional deficit it has to incur if the commodities are sold below the market price, on the one hand, and the relief on the inflation front, on the other. Today, the fiscal deficit is so huge that an additional amount is going to be marginal. Even if the suggestion is implemented in relation to only rice, it will make a huge difference to the storage problem. The buffer stock norms for rice are 11.8 mt, 12.2 mt, 9.8 mt and 5.2 mt, on January 1, April 1, July 1 and October 1, respectively. The current level of stocks of rice is such that the government can take the risk of unloading a large quantity on the market without worrying about the possibility of a fall in rice output in kharif due to inadequate rains and inability to procure. The price to be fixed and the stocks to be released should be such that they make a substantial difference to the situation.
Speculative hoarding?
The reasons for the high level of prices of rice and wheat despite favourable production trends in the last two years can be surmised. One reason could be that due to the massive procurement operations of last year the floating stocks in the market have been reduced. Against this, one has to reckon with the shifting of the demand curve, thanks to the massive additional purchasing power released under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). There is also the ever-suspected speculative hoarding of foodgrains by traders and processors. State governments have passed orders on the maximum stocks permissible for these categories. Big farmers could also hoard their stocks in anticipation of better price realisation after the marketing season is over and the lean season starts. Nearly half a century ago, noted rural expert Daniel Thorner undertook a tour of the coastal districts of Andhra constituting the rice bowl of the state and wrote an article entitled “Coastal Andhra — towards an affluent state” in the then Economic Weekly. He found heavy stocking of rice by farmers. In one instance, his respondent told him that he had 10,000 bags of paddy/rice and they were equivalent to a year’s family consumption! In fact, the Reserve Bank of India (RBI) introduced selective credit control (SCC) after a survey in west Godavari district revealed heavy financing of rice millers at a time of price rise. In any case, SCC, which is dead for all practical purposes, has a limited effectiveness as it only ensures that bank credit is not used for the speculative hoarding of commodities in short supply. The speculators have their own and other sources of funds for their businesses.
The good news is that data obtained from RBI on the advances against the pledge or hypothecation of selected sensitive commodities do not reveal any large involvement of banks that should disturb the authorities now. At the end of October 2009, the total of all advances against sensitive commodities amounted to about Rs 33,000 crore constituting only 1 per cent of total non-food credit (excluding credit to the Food Corporation of India). Paddy, sugar and cotton are the three important commodities accounting for nearly three-fourths of the total of all commodity advances. Advances against rice have gone up substantially over the last few years but the amount is not significant in relation to the value of production. The advances have their own seasonal features depending on their production cycle. But an analysis of the data for different months generally supports the above conclusion.
The author is an economic consultant
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