The first year of the Modi govt saw some hits, like the offloading of FCI stock in the open market, and some misses.
A scan of Indian agro-trade in the first year of the Modi government reveals a blend of significant positives and negatives. The momentum of the past built a legacy and the proactive steps taken in the past year augur well for reforms. However, some policies have remained static and continue to complicate the supply-demand mismatch and threaten export realisation. With the steep fall in crude-oil prices, demand for biofuels stands compressed. This has perhaps led to a retreat in global agro-commodity values and has also dented India’s export competitiveness in wheat, sugar, corn, oil and soy-meals. Lower exports also diminish domestic demand pressure. That may keep inflation down, but provides poor realisation to producers.
Ironically, India, in FY16, could become a net importer of superior-quality wheat (estimated at 1 million tonnes) from being a consistent exporter since 2011—0.5 million tonnes have already been contracted at landed prices which is cheaper than local cost. Imports from Australia, Russia, Ukraine and France are foreseen.
Wheat and rice
The Modi government wisely raised MSP of wheat and paddy by 4%, a departure from the high MSP increases of the past, and shunned the extra bonuses given to farmers earlier by both the Centre and the states. Credit is due to the food ministry for reducing public stock-holding of grains by efficiently managing procurement of wheat and paddy and offloading some of it in the market—from a peak of 60 mt in FY13, it has been brought down to 34 mt in FY15. This implies lower commitment of public funds for procuring stocks in surplus, increased availability of grains in the open market and a sharp drop in inflation. There are two factors behind the reduction—first, the abolition of the levy-rice policy and second, the evacuation of 4 mt of FCI wheat through exports in the last two years.
Eliminating levy rice policy has ensured substantial availability of non-basmati rice in market at lower prices, thereby enabling exports competitiveness. India registered the world’s largest rice exports in FY15 (at 12 mt), in the overall rice traded worldwide (42 mt).
The wheat stockpile could have been reduced by another 2-3 mt had the government not dithered in making marginal adjustments in contracting at when global prices were $290-$299 per tonne fob, and later, $260-$270 fob—the fall in the rupee’s value in the last two years would have earned significant gains. Niche opportunities were missed by sheer inflexibility in decision-making.
There is no possibility of exporting low-quality Indian wheat in FY16 as world prices are set to fall below $185-$195/mt fob. Another difficult decision that the government now faces is whether to distribute low-quality wheat under the PDS or to explore other alternatives for its disposal.
The over-supply of sugar (27-28 mt) as compared to the demand (23 mt), bulging carry-in stocks of 10 mt and lower prices (down by 9% from a year ago) have further complicated an already tricky situation that involves about R21,000 crore of arrears due to farmers and 550 millers having suffered crushing losses. The poor financial health of the sugar industry has meant that banks, which lent to millers, are now burdened with loans that could soon turn bad. Exports are down to 0.5 mt while the expectation was of at least 2.5-3 mt being shipped out by Indian traders. Neither the states nor the Centre have shown enough willingness to correct the existing situation of pricing of cane, which is now a political issue for cane-growing states with the cane-farmers votebank in mind. Granting WTO non-compatible export subisidies to sugar , proposing public procurement of sugar (to create a 3 mt-buffer) or chasing mills for payments to farmers—all of these are solutions like the ostrich burying its head in the sand. The issue of the state-advised price for cane has to be taken by the horns and dealt with once and for all. The policy perspective behind such action is to be prioritised rather than hollow polemics.
India imports about 12-13 mt of edible oil per annum—palm oil constitutes 80% while the balance 20% is soy, sunflower, canola, etc. The global prices of edible oils are declining in tandem with the fall in global agro-commodity prices. The wholesale prices are also reflecting the same trend. But domestic manufacturers demand high import duties to in order to nullify competition from lower-cost imported oil. High seed prices, due to low production or speculation in future exchanges or hoarding by the farmers, is behind the high-priced locally crushed oil.
Why should the consumer should pay high prices for edible oil and why should the government be an accomplice in this? World prices will continue to plunge down with higher yields due to adoption of GM technology. If our production remains inconsistent with the global adoption of GM technology, the local industry is bound to remain sick.
Inflation in pulses, at 15.38 %, is the only black mark while milk, fruits and vegetables are reflecting marginal deflation. The import intensity of pulses will be significantly move up if predictions of a deficient monsoon this year come true. Nearly 70% of pulses are rabi crops where gross area of cultivation competes with wheat—another rabi crop. The predominance of wheat in sowing area—due to the MSP and public procurement support from the government—comes at the cost of pulses. Four to five million tonnes of import is foreseen, with substantive price escalation.
For full marks in agri-trade, the government needs to figure out how to dispose the low-quality wheat stocks and display the courage to prod states out of populist cane-pricing. It also must take a well-considered view on adopting GM technology for oilseeds and should not mess up imports of pulses through subsidies.
The author is a grains-trade analyst.