Wheat imports: Subverting procurement

For the second year running, India is importing wheat. Last year the government justified, citing lower output in India. This year, even without that excuse, the government has decided to import 50 lakh tonnes of wheat, ostensibly to ensure that there are enough stocks to meet the requirements of the Public Distribution System (PDS). From a wheat surplus nation only a few years ago, India today has turned into the world's largest importer of wheat.

In March this year, despite predictions of a bumper wheat harvest in India, US Wheat Associates - a trade body funded by the federal government and US wheat producers - predicted India would import up to 30 lakh tonnes of wheat this year. The Indian government has in fact exceeded this claim, and has revised its own estimates for imports by a further 20 lakh tonnes. There are two questions thrown up by the wheat import policy this year. One, aren't there alternatives to high-cost imports that would be more attractive to the exchequer in India? And two, how could a foreign trade body be confident that the Indian government would be forced to import grain in large quantities despite a bumper crop in its own territory? The answers to these questions are related.

The rush to import right now is certainly questionable. Since the peak wheat procurement season is during the second half of May, there is ample time left for the government to meet its PDS procurement target of 151 lakh tonnes. Also, with an additional 18 lakh hectares over last year under wheat, the production of the crop has increased by forty lakh tonnes. On 1 May, the Food Secretary declared that wheat stocks are adequate to last till January 2008. On 5 May, the Agriculture Minister, Sharad Pawar, announced that "last year, the buffer stock position was only two million tonnes, this time it is 4.5 million tonnes. I am quite comfortable about the buffer stock."

But bizarrely, Pawar turned his own rationale on its head, and justified the current drive to import grain, saying, "However, I want to build up stocks for next year". That is, although there is plenty of wheat stock within the country, the government believes that it must import from abroad to be sure that there are no shortages in the buffer stock in case there is a bad crop next year. Since the crop for next year is yet to be planted, the Minister's apprehensions of a bad crop next year are inexplicable.

Procurement policy - India's poverty, foreign wealth

The contradictions in the government's views are borne out in the procurement figures. This year, the procurement is worse than what it was last year. By end of April, even half of the procurement target was not met. In a replay of 2006, when the Food Corporation of India (FCI) failed miserably to meet its procurement target, this year too it appears that adequate domestic procurement by FCI is unlikely to take place, and a shortfall of 25 lakh tonnes by the end of the procurement season is possible. Why? For a simple reason. The government's Minimum Support Price for wheat procurement this year, Rs.850 per quintal, is lower than what private buyers are willing to give Indian farmers (Rs.1000 to 1100 per quintal). As a result, farmers are choosing not to sell to the government unless a higher support price is offered.

Pawar explained his response to this scenario thus: "If the farmer is getting a better price [from private buyers], as Agriculture Minister I am the happiest person. However, as a Food Minister, if I face any problem, I will import."

The irony is that imported wheat is not cheap, by any means. This year, lack of rainfall in Europe, Australia and South Africa has affected wheat production and depressed world wheat stocks to their lowest in the last 25 years. Wheat from Ukraine and Russia will hit markets only by August, while Pakistan is still a small exporter. Major wheat exporter, Argentina, has banned wheat export to control domestic prices. With all this, the only players left are the US and Canada, where the price of wheat is already up by $40 per tonne over last year. Given the global supply crunch, announcement of imports by India will push the price through the roof, as it happened last year. While last year India paid around $207 per tonne (approximately Rs.930 per quintal) of wheat, the cost this year is likely to be upwards of $300 per tonne (around Rs.1200 per quintal at the current exchange rate).

Instead of doling out Rs.6000 crores to corporations for importing 50 lakh tonnes of wheat, a hike in the MSP would have fetched an even higher price to Indian farmers than what they are receiving from private companies, and also helped FCI meet the procurement target. But rather than pursue this win-win scenario for Indian farmers and the government, what we are seeing is a government that seems determined to pay a premium to grain corporations and deny a competitive price to our farmers.

A new stance

Why should the government be willing to import wheat from foreign countries at a very high prices, but unwilling to pay Indian farmers a higher MSP rate? During last year, why did the government prefer to source PDS rations from the Australian Wheat Board, and from corporations like Glencore, Toepfer, and Cargill, rather than from Indian farmers? Why is the government bent on buying wheat from grain corporations this year as well? These are important questions, and the government's position may be telling us a little about the likely direction of Indian agriculture in the coming years.

Shortages in the buffer stock, especially for PDS, it is well known, could be political dynamite. Thus, no matter what the price, the government is forced to purchase wheat to meet its buffer stock norms, either from Indian farmers or through imports. Prices for Indian farmers are set through the MSP, while import prices are driven by the global market for wheat. The fact that the government prefers higher-priced global wheat to procurements through MSP purchases is a clear indication that its real agenda is to subvert the support price mechanism itself. This is why, even at a high cost to the exchequer, the government's preference is to import wheat. Its message to the Indian wheat farmer is loud and unambiguous: we will no longer provide the price guarantee that we have provided all these years.

Food subsidy for the poor cost the exchequer Rs.23,986 crores during 2006-07, and the government is looking for ways to slash this. One commonly heard approach is to make the system 'market-driven', a loose but well-understood code for privatisation and competition. The evidence is overwhelming; look at the other moves taken in the past few years alongside the decision to import wheat. At the behest of the Centre in 2003, most states have amended the Agriculture Produce Marketing Committee Act to allow private agencies to directly procure food grains from farmers. The amended Essential Commodities Act allows storage and movement of food grains. Agriculture commodities can be traded in futures markets involving speculation. Through these actions, the preference for market-driven pricing and procurement is explicit. These have also enabled private companies to corner bulk of the produce in the last two years.

There is more. The government is also toying with the idea of issuing food stamps to the Below Poverty Line (BPL) families, which will reduce the food subsidy bill. These stamps could then be used for food purchases in any store, eliminating the need for a dedicated PDS. There is also another proposal before the government to replace PDS rations with direct cash payments to poor families. To reduce storage costs, the government is considering playing in the futures market in the months when it needs food grains for running the PDS - there would be no need for an MSP in such a case. The warehousing system is also being privatised. Recommendations of the consultancy firm McKinsey, hired by the Food Ministry, are already being implemented and FCI's capital costs have been reduced, workforce slashed, minimum buffer stock for rice lowered, and private companies engaged in procurement.

A covert approach

In recent years, the Indian State has had a history of subverting procurement and price support mechanisms. Back in 2002, dairy cooperatives were on the brink of being wiped out courtesy dumping by the developed countries, which was facilitated by the State. In case of cotton, the Maharashtra government subverted the monopoly cotton procurement scheme and today the price being paid to cotton farmers is a fraction of what they received earlier. Similarly, Marketfed in Kerala, which procures pepper from farmers, is facing subversion. The cases of cardamom, coconut, cashew - in fact, almost all agri-commodities - have a common thread running through them: deliberate subversion of procurement mechanisms, and manipulation of support prices.

That there are problems at FCI, and in the PDS, is well known. However, dismantling these will amount to removing a critical safety net for farmers, as well as the poor who depend on the Public Distribution System. While today farmers may be getting a higher price by selling wheat to private buyers, their euphoria is unlikely to last long. Eventually the market will turn against them, and the absence of support prices will hurt. Also, in the absence of MSP and procurement by government, there will be only set of large buyers left, the agri-business corporations, which may begin to dictate prices to Indian farmers. If that were to happen, the demand for a restoration of support prices would be powerful. A government that proposes to remove MSPs today should also be able to say how it would respond to such pressures at a later time, not merely leave a future administration to deal with that eventuality.