1. Why India may need to import up to 5 million tonnes of wheat

Why India may need to import up to 5 million tonnes of wheat

In 2016-17, import at the current rate of exchange (without custom duty) may not exceed Rs 1,400 per quintal against an MSP of Rs 1,525 per quintal.

By: | Updated: June 1, 2016 7:08 PM
United Nations Environment program, Wheat, Maize, toxins in crops, health Advance estimates of about 94 million tonnes (MT) of wheat still remain unchanged for 2015-16. Last year, wheat output was about 86 MT and FCI/state government agencies procured 28 MT, while official purchases are limited to about 23 MT this year—a gap of 5 MT. (Reuters)

Media reports mention that there is a ‘question mark’ on the wheat production estimates for 2015-16. One cannot fault the government for lower output this year, which could be due to combined effect of two successive droughts and some policy-related issues—their impact cannot be apportioned anyway. But the concern is that official data appears to be at variance with market conditions.

Advance estimates of about 94 million tonnes (MT) of wheat still remain unchanged for 2015-16. Last year, wheat output was about 86 MT and FCI/state government agencies procured 28 MT, while official purchases are limited to about 23 MT this year—a gap of 5 MT. There are other probable factors too that point to a steep fall in production.

Murmurs emanating from FCI that OMSS (open market sale scheme) to private players may not be serviced this year; last year, 7 MT was disposed of due to excess availability;

Private import contracts of more than 0.5 MT are already concluded despite duty of 25%;

Lower sowing coverage area from 31 million hectare (MHA) previous year to now about 29 MHA;

Yield drop due to drought could be less than the average of 3 metric tonnes per hectare;

Market prices in Delhi and Uttar Pradesh in the harvest season—when supplies are considered ample—are up from an MSP of Rs 1,525 per quintal to Rs 1,600-plus per quintal; in southern India these are around Rs 2,000 per quintal.

These are definite indicators of a low output. Market estimates it at 84 MT, which is about 10 MT less than the official assessment. This necessitates that overall wheat supply demand may be correctly configured so that timely action to supplement the shortfall by imports is taken.

India’s annual ‘food’ consumption—excluding seeds, feed and wastage—as provided by the National Council of Applied Economic Research (NCAER) in 2012-13 stood at 82 MT, and even if we take 1% increase in usage, it is projected at 85 MT on a non-compounded basis. The accompanying chart details the ‘Indian wheat budget’ with comparison of deemed official estimates and the rationale of market perception for grain available for human consumption. A back-of-the-envelope calculation is that the country may have to import 4.8-5 MT if trade sentiments are accounted for.

The positive side of lower procurement is that excessive stock-holding creates burden on the national exchequer, lack of storage space leads to wastage and pilferage, while the flip side is higher market prices, consequential inflationary pressure in the economy and it adds to the compulsion of import failing which the fundamental need of the citizens is at a great peril.

Global stocks of wheat are abundant, at 225 MT. French or Russian wheat can be accessed below $200 per MT fob; sea freight rates are much cheaper than those available in 2006-07 (the last Indian official import). Import prices ranged around $310-330 (cost and freight) in 2006-07, and the dollar-to-rupee rate was 41-42—that is at Rs 1,350 per quintal—while MSP was Rs 750 per quintal.

In 2016-17, import at the current rate of exchange (without custom duty) may not exceed Rs 1,400 per quintal against an MSP of Rs 1,525 per quintal.

Surely, if the government declares a shortfall in this year’s production with the intention of import for FCI—which is well factored in the international market—there could be some more spike in international prices. This is inevitable and cannot be avoided.

If policy-makers intend to cut down the role of the government in managing the commodity (the less the government, the better it is) and do not wish to offer 7 MT of wheat through OMSS this year, then it may facilitate ‘ease of doing business’ for the private players, including India-based MNCs, by removing or curtailing the import duty of 25%.

More than 1 MT of wheat has already been traded for flour millers in 2015-16 and so far in 2016-17. Most of these imports have been serviced for flour millers in southern India from France and Australia. There are some obvious advantages of import by private players—it will be need-based and in small lots, as compared to large volumes of single transaction by state trading enterprises; government funding will be avoided; international prices will have to compete with domestic market and vice-versa; and excessive stocking or wastage or pilferage on government account will be prevented.

Large-scale wheat imports are imperative this year. It is to be seen whether the government steps in or enables private trade to fill in supply/demand shortfall. Parallel imports both by the government and private parties may best be shunned to prevent hyper volatility in international prices.

wheat

The author is a grains trade expert

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