Contrary to the general perception that zero import duty on wheat notified by the government on December 8, 2016, will hurt interests of Indian farmers, it will, in fact, benefit them.
Contrary to the general perception that zero import duty on wheat notified by the government on December 8, 2016, will hurt interests of Indian farmers, it will, in fact, benefit them. In April-June 2017—during the Rabi harvest time—the Food Corporation of India (FCI) and state agencies will have to build up stocks by adding 32-33 million tonnes (MT) purchases from farmers because reserves are disappearing rapidly. Thus, overriding emphasis for buying locally will be vital. If this target of 32-33 MT is not achieved, wheat import on government account may have to be considered.
Procedurally, the government’s import through tenders is a long and cumbersome exercise, with concerns of post-contractual controversies on prices and timing, which is avoidable if import is undertaken by the private sector at zero duty. The government can then concentrate on local procurement and service PDS requirement without resorting to imports—leaving that to private players.
Zero duty will be advantageous to consumers, importers and even the government. International prices are cheap (Rs 14 per kg landed in south India), lower than the Indian MSP (Rs 16.25 per kg, ex-North India). Therefore, the decision to reduce duty to nil is rational and timely.
The specifics as to why duty is made zero need to be briefly elaborated. Now, while the government has consistently claimed the Indian wheat output of 2016-17 at 93.5 MT, market players estimated the production not exceeding 84 MT. FCI and state agencies were able to procure only 23 MT, against the target of 28-29 MT. Local prices, immediately after the harvest (in May-June 2016), started firming up, especially in south India, where wheat is relatively more expensive due to high incidence of local handling/freight from the north (Ludhiana, Punjab) to, say, Cochin, Mangalore or Tuticorin. Millers in the south also felt that sufficient produce of Madhya Pradesh was not available to meet their needs. FCI tapered down the sale of the grain in the open market, indicating tightness of cereal, with the Centre. This bolstered the speculative sentiment of bullishness in price.
The import window of wheat on open general licence (OGL) was available. Importers commenced procurement from Australia, initially around $225-240 CIF (landed at east coast Indian ports), and thereafter from Ukraine, Russia, France and Bulgaria around $200-210 CIF.
The government imposed a customs duty of 25% in June 2016 to limit imports, without realising the higher demand pull and lower stocks in the central pool. The imported grain’s cost with 25% duty was estimated at par with Indian wheat in the south at Rs 19-20 per kg against the MSP of Rs 15.25 per kg.
Cargo of about 1 MT of imported wheat arrived by August-September 2016. Analysts believe 60% tonnage came from Ukraine, 30% from Australia and the balance 10% from other origins. They were warehoused in custom bonded facilities, in anticipation of the government reducing duty to 10%. This was done in September 2016. This dispensation sweetened deals, both for importers and millers, with reasonable margins. Trade also contracted additional 1 MT after September 2016 from the above stated origins, taking the total import to 2 MT by November 2016.
Low stocks in central pool
Private imports softened pressure on FCI and state agencies to offload their grain in the market. In fact, FCI and state agencies continued predominantly to cater to the demand of PDS. Stocks in the central pool have depleted to 16.5 MT as of December 1, 2016.
It will touch around 14 MT on January 1, 2017—almost equal to the buffer norm on this date—versus approximately 24 MT on January 1, 2016, which is a decline of 10 MT (see chart). With 2.5 MT of consumption per month, the central pool stocks will be 6.5 MT, which is 1 MT below the 7.5 MT stipulated buffer reserves as of April 1, 2017, which is very critical for a nation of 1.3 billion population.
The intention behind the government move to finally reduce duty to nil in December 2016 is to prompt more imports by private players, because farmers have no grains to sell from November 2016 to April 2017 to the millers.
Government to incentivise purchases from farmers
The effect of demonetisation will linger in the next two quarters, which means that farmers will encounter cash constraint from market players. In addition, the wheat output in 2017-18, at best, will be around 86-87 MT, given the fact that grain has to mature in a mild winter, wherein sowing was also delayed. Some marginal fall in yield below 3 MT per hectare is not ruled out. Should government agencies fail to acquire less than 33 MT wheat, the supply-demand matrix of self-sufficiency will be elusive. To replenish stocks, the government will like to corner maximum grain for its granaries, and farmers too will give preference to official purchase at MSP of Rs 1,625 per quintal. It is quite possible that the authorities may have to limit private parties’ procurement to match its target.
During December 2016 to March 2017, additional contracting of 1 MT or so could be anticipated; it will take total annual imports to 3 MT by 2016-17. The government has kept nil duty open-ended, which implies that it might impose duty at any time but it is unlikely that a review will be made before June 2017 when the quantum of official procurement will be clearer. If Indian prices are competitive, imports will be automatically regulated. In case prices abroad escalate, imports too will halt.
It is a sad commentary that, for the last 3-4 years, we have been producing less wheat and consuming more, resulting in disappearance of excess stocks. The possibility of shifting sowing acreage to other crops like chana, mustard, etc, is not ruled out. The ministry of agriculture needs to boost domestic output to match demand in the coming years, to contain the rising volume of imports.
The author is a grains trade analyst. Views are personal