Where has India’s record wheat and rice output gone?
- We need an explanation for persistent food price volatility despite a flurry of government interventions
Tomato consumer price index (CPI) inflation that was 201.5% in July, year-on-year, is set to ease. New supplies from farms have reduced prices that, in the absence of government procurement, have crashed to ₹5 per kg in Maharashtra. But food inflation won’t ease anytime soon. That’s because inflation in cereal prices, especially wheat and rice, is still high. Cereals contributed nearly as much to August CPI inflation as tomatoes (15.49% versus 15.51%). Why the government has failed to control cereal inflation is a bit of a mystery.
The government says that there is record production of wheat this year. It said the same for last year as well. It has had a ban in place on wheat exports since May 2022 and on the export of atta and similar products since August 2022. From June this year, it banned traders, millers, wholesalers and retail chains from holding more than 3,000 tonnes of wheat. Smaller retailers and shops cannot stock more than 10 tonnes. Even after these measures, certainly unusual for a time of record production, the government has managed to procure barely 26.1 million tonnes of wheat, less than the current rabi season target of 34 million tonnes. The shortfall was more severe last year: The government procured all of 18.8 million tonnes against a target of 43.3 million tonnes. The desperate measures—controls and limits on stocks that are being used for the first time in 15 years—to access supplies did not help improve procurement much.
They did not cool inflation either. Wheat CPI inflation was 15.7% in August 2022. It leapt to 25.4% by February this year when market prices were ruling way above the price at which the government had said it would procure wheat from farmers, i.e. the MSP (minimum support price).
Panic struck: How would the government procure wheat at such high prices for its free food programme? Buying at market prices in competition with private buyers would bankrupt the exchequer. Importing wheat was out of the question; it would be too embarrassing politically in a year of elections in wheat-growing states such as Madhya Pradesh. It was decided to beat down market prices, although purposely depressing farmer earnings meant defying the Prime Minister’s instructions of doubling farmer incomes. By selling wheat from the government’s stocks at prices lower than its economic cost (of buying, transporting and storing), market prices were dragged down to the MSP level. Wheat CPI inflation cooled to a shade above 9% by August.
The rice story is even more curious. Rice CPI inflation was 12.5% in August even after the government banned exports of non-basmati rice, has been selling from its stockpile (comfortably at three times the norm) at prices lower than their economic cost, has placed a 20% export duty on parboiled rice, and has fixed a minimum export price for basmati that is way above prices being bid by international buyers, making it uncompetitive in the global market.
What’s going on? An analysis by economists led by noted agriculture economist Ashok Gulati (bit.ly/44VySGX) offers a few clues. Exports of non-basmati rice shot up from 1.38 million tonnes in 2019-20 to 6.4 million tonnes in 2022-23. The exports last year, according to Gulati, were at prices lower than the MSP, which, he argues, suggests rice from the free food programme is leaking out of the country in big quantities, resulting in higher domestic prices.
With wheat procurement again missing its target, the coming festive season could see inflation pick up. The only way to guard against a flare up is to import wheat, as was done in 2016-17, when the late Ram Vilas Paswan was the minister in charge of food supplies. International prices are affordable.
A policy error at this point can quickly escalate. The food inflation and supply mess can spill over into the rest of the economy, distorting policies all around. High retail inflation could force the central bank to hike interest rates, hurting India’s economic recovery and blowing up the treasury’s already high borrowing costs, threatening fiscal correction in a year that tax collections have been unsatisfactory so far and there’s political pressure to spend more in the run-up to next year’s Lok Sabha elections. Beating down farmer earnings is futile also because it reduces consumption spending in the economy.
The telling sign of a well-functioning political system is if it can prioritize objectives and make policy choices that reflect them. The mismanagement of India’s food economy since May last year calls for urgent corrections. The government has not managed to cool prices sufficiently even after penalizing farmer earnings and distorting markets. The Centre must explain where all of the record production of wheat has disappeared. If heatwaves hurt India’s wheat output, reducing procurement, putting at risk the government’s free food programme and stoking inflation, then why is the government sticking with its questionable narrative of record output? If there has been record back-to-back output in two years that wasn’t allowed to be exported or acquired in large quantities by private players, then why isn’t enough wheat available for procurement? Why should any rice meant for the poor leak out of the country?
Meanwhile, the opposition chooses to spend its time drawing up boycott lists, either unaware or unbothered by the mess in India’s food markets.
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First Published:18 Sep 2023, 09:35 PM IST
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