Russia-Ukraine Conflict: Global Crisis Of Wheat Shortage Poses An Opportunity For India
Better quality foodgrain supply will get diverted to export market, a plus for farmers and exporters but a big minus for consumers.
It is somewhat positive for government by way of reduction in MSP procurement and reduction in food subsidy bill.
Baisakhi last week brought cheer with bountiful, record production of wheat. The festival used to mark the end of wheat harvesting period, but now due to climate change, crops are still standing in fields, especially in Majha region of Punjab, awaiting ripening and harvesting.
What is the point of this recall? A global crisis of wheat shortage presenting an opportunity for India. Russia and Ukraine together export almost 30 per cent of total wheat exports in global market and the trade disruption due to Russia-Ukraine conflict have created a huge demand for export of Indian wheat.
India is the second-biggest producer of wheat in the world (China at number 1 producing 30 per cent more and Russia at number 3 producing 15 per cent less than India, and the USA is number 4 producing less than half of Indian wheat production).
It is a remarkable journey for a country that was importing foodgrain 75 years ago when she threw the colonial yoke to become independent.
With two major wheat exporters locked in a war, the world is now looking for countries that can fill the void. Will India be able to rise to the occasion? Can it overcome the logistical bottlenecks?
India exported 70 lakh metric tonnes (MT) of wheat in 2021-22, almost 6.5 per cent of total annual production exceeding 1100 MT. Traders have contracted export of 30-35 lakh tonnes of wheat during April-July 2022. Wheat exports were just 21.55 lakh tonnes in 2020-21, about 2 per cent of annual production. In current financial year, wheat exports could cross 100 lakh tonnes during 2022-23.
For past some years, the government granaries have been overflowing with excess wheat procurement. Food Corporation does not have enough covered godowns to store excess wheat stocks, which are still high despite free distribution of 5 kg per head per month since April 2020 under the Pradhan Mantri Garib Kalyan Yojana (PMGKY). The scheme has recently been extended up to September 2022.
Under the scheme, more than 81.35 crore people are eligible for 5 kg free wheat/rice per person per month, along with 1 kg free whole chana to each family per month. This free distribution is over and above the distribution of 5kg wheat or rice per head per month under the National Food Security Act.
National Food Security Act, 2013 converted the public distribution system being operated as a government scheme into a legal guarantee entitling every person belonging to a “priority household” to receive 5 kg of foodgrains per month at a subsidised price not exceeding Rs 2/kg for wheat and Rs 3/kg for rice. Priority households were further defined so as to cover up to 75 per cent of the country’s rural population and 50 per cent in urban areas.
At the beginning of April 2022, Food Corporation was holding 323 MT rice and 190 MT wheat besides 339 MT of unmilled paddy. As per stocking norms, FCI is supposed to hold 115.80 MT rice, 44.60 MT wheat as operational reserves and 20 MT rice and 30 MT wheat as strategic reserve on 1 April.
It means against normal holding of about 75 MT wheat, FCI is holding 190 MT wheat! Against normal holding of 136 MT rice, FCI is holding 323 MT rice and 339 MT of unmilled paddy! And yet farmers of Telangana are giving a dharna in Delhi asking the centre to procure more rice from the state. Orissa is also aggrieved on this count. [Farmers in both these states have ‘parboiled rice’ to offer that is not in demand on all-India basis].
So the Government of India has a serious problem at hand, holding almost three times its PDS requirement in stock without adequate storage space. Some stock is bound to get spoiled.
Why is government holding so much stock? The stocks are procured for supply to some 82 crore poor people, and the stocks can meet the supply for almost two years. The reason is over-production [relative to market demand], oversupply pushing the market price down needing higher and higher procurement by the government at increasing MSP (Minimum Support Price).
The way PDS system operates today, both the (82 crore) consumers and about 1.5 crore farmers benefit from this system that costs the central government over Rs 200,000 crore annually. Food subsidy expenditure was about Rs 286,000 crore in 2021-22.
The total amount paid to wheat farmers increased from Rs 33,874 crore in 2013-14 to Rs 75,060 crore in 2020-21. For paddy, the increase was even bigger: from Rs 63,928 crore in 2013-14 to Rs 172,752 crore in 20-21.
1.54 crore rice-growing farmers and 43.36 lakhs wheat-growing farmers benefitted from MSP in 2020-21 compared to 1.24 crore rice farmers and 35.57 lakhs wheat farmers in 2019-20.
Some 20 years ago, about 20 per cent of wheat/rice production was procured by the government at MSP. At present, governments are buying about 40 per cent of wheat production and 50 per cent of paddy production at MSP.
Therefore, the crisis of global wheat shortage has come as an opportunity for Indian farmers. Is it really a matter to rejoice?
Every conflict causes misery and deprivation, not just by direct physical harm to those engaged in warfare or caught in crossfire, but also other collateral damage and casualties through loss of production and impairment of logistical infrastructure.
The human cost of 30 per cent of global wheat exports suddenly becoming inaccessible and similar other loss of supplies in other staples like corn is enormous. This demand-supply gap will push food prices up. Better quality foodgrain supply will get diverted to export market, a plus for farmers and exporters but a big minus for consumers. It is somewhat positive for government by way of reduction in MSP procurement and reduction in food subsidy bill.
The interconnection between wars and business are well-known. Sometimes, business interests guide and instigate wars. Wars destroy businesses and also create new business opportunities. There are gainers and losers.
For us, the conflict may be economically burdensome on an overall basis if it fuels high inflation. On the positive side, we get some relief due to purchase of discounted price Russian oil (a small fraction of our total requirement); wheat exports (somewhat higher than our normal exportable surplus) and reduction in food subsidy bill due to reduced requirement of MSP based procurement.
The negative effects of rising inflation on growth may be more pronounced. A modest dose of inflation is good for growth but higher inflation imposes an invisible tax on the poorer sections. Inflation worries and trade disruption in our export destinations also negatively impact our export prospects.
In its latest Monetary Review, the RBI has flagged rising inflation as a concern. Both food and fuel prices are primary drivers of inflation and both are under upward pressure due to this conflict. This acts as a dampener to the otherwise exciting prospects of fast-paced growth we have been seeing for past several months.
So while we may be excited about some short-term gains but our concerns on inflation remain, purely looking at the conflict from an economic angle. However, a lot more is at stake beyond economics.
This article was first published on the author's Facebook page.
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