Putin’s Policies Set To Deal A Soft Blow To Modi’s Farmer Outreach Efforts

On 28 February in its second advanced estimates for agricultural production, the Indian government pegged wheat production for this year at 97.11 million tonnes (mt) against last year’s record 98.51 mt. Two events preceded the government’s announcement on agricultural production.

On 15 February, the government set a target of 32 mt wheat procurement by the Food Corporation of India (FCI). In October, the government decided to increase the minimum support price (MSP) for wheat this year to Rs 1,735 a quintal, up Rs 100 over last year. This cost makes up 38 per cent higher than all costs including labour, land rental and input costs.

In addition to the MSP announced by the central government, state governments like Madhya Pradesh have announced bonus payment for wheat procurement. Madhya Pradesh will pay Rs 200 a quintal extra for procurement of the grain.

Competition From Private Players

Last year, the FCI procured 30.82 mt of wheat with more than a third coming from Punjab (11.71 mt). Over 60 per cent of the procurement was made in Punjab and Haryana, which together totalled 19.1 mt of wheat bought from farmers. However, last year FCI faced competition from private players and flour millers who also were in the market to buy stocks. According to a Reuters report, FCI targeted large mandis and urban areas for procuring wheat since private players resorted to door-to-door campaigning in rural areas to meet their requirements. (The food agency procures wheat for the central pool that supplies food grains to states for supply through ration shops called called operational stock, and also to meet any food emergency termed strategic stock). The lowest stock level since the beginning of the decade led to this fight for stocks last year.

Though the FCI has set a target to buy 32 mt this year, it will likely under pressure to buy more. Production might be lower this year, but the Indian wheat market is well supplied. Stocks are aplenty that the Centre is considering to increase import duty to 50 per cent from the current 20 per cent. This, the government thinks, can offer some sort of price protection to the growers.

Higher Global Production

According to flour millers, there is no worry over wheat supplies this year. Media reports in December said over five lakh tonnes of imported wheat are lying in various ports across South India. According to the US Department of Agriculture World Agricultural Supply and Demand Estimates, released last week, global wheat production will likely be higher this year at 758.79 mt against 750.51 mt last year. This will result in end stocks being higher at 268.69 mt against 251.60 mt last year.

As a result of these developments, Indian shores could be a threat to wheat imports despite a 20 per cent import duty. Going by current prices in the global market at nearly $200 a tonne, imported wheat, including from Australia, can reach the gates of southern flour mills below Rs 18,000 a tonne after transportation costs are paid. If a mill in southern India has to buy wheat from north India, it will have to spend nearly Rs 19,000 a tonne, including transportation costs, to get wheat to its gates. This means, the Modi government will likely raise the import duty anytime now.

Significance Of Black Sea Region

On the other hand, the global scenario leaves the central government with an even bigger challenge. A major reason for the government’s problem in ensuring that wheat farmers get a fair price for their produce is Russia, currently the top exporter of the grain in the world. The former Soviet Union constituent today controls the global wheat market not just with huge exports but also with policy interventions like subsidies, trade restrictions and taxes. The Black Sea region and its neighbouring areas contribute 30 per cent to total global wheat exports and hold the balance in world trade.

According to Australian Export Grains Innovation Centre, the Russian grains industry enjoys significant competitive strengths, one of which is lower supply chain costs. Russia’s focus on food security has had implications on the grain export industry with Putin administration’s policies and actions in the past decade showing promising results.

Russia’s largely rural population provides low cost labour compared to other countries like Australia, Canada and the US, while providing a more cheap and flexible road freight network. Putin government’s policies to provide corridor for shipping grains have helped exporters to ship large volumes. This has resulted in global commodity trading firms like Cargill and Glencore investing in Russia’s agricultural markets and developing them.

Collapse In Energy Products Price

A collapse in prices of energy products like petroleum has forced Russia to focus on agriculture to diversify its economy and support research and development for higher per acre yield. As a result, this year, Russia could export 37.5 mt wheat, a huge surge from the 1990s when it first entered the global exports market.

How this will impact India and the Modi government is that farmers could queue up before FCI and other procurement agencies like state warehousing corporations to sell their wheat. FCI could be compelled to buy more wheat than what it has targeted. Unfortunately, India has never been a serious exporter and the last time when wheat was exported, exporters had to be given subsidies. The other problem for the Food Ministry, in particular, and the government, in general, will be finding storage space. According to FCI data, it had 17.5 mt of wheat stocks as on 8 February this year much higher than the stipulated 7.4 mt stocks required as on 1 April. The stocks are 6 mt higher than the same period a year ago.

Fortunately for the Food Ministry and its arm FCI, Union Finance Minister Arun Jaitley has been alert enough to the unfolding scenario by allocating 20 per cent more funds to the FCI for food subsidy at Rs 1.69 lakh crore. At Rs 1,735 a quintal, the Centre will have to spend Rs 5,725 crore alone. Then, there are expenses to meet mandi fees, transportation and loading/unloading. Madhya Pradesh will have to spend an additional Rs 135 crore if it were to procure the same quantity of 6.75 million tonnes of wheat like last year. But heading for elections, the Shivraj Singh Chouhan government wouldn’t let anything to chance. The key here will be how quick and well can the agencies procure wheat to stop any sharp fall in prices. The Centre will be hard-pressed to prove that its policies are farmer oriented as global markets are seen under pressure well into the year-end. And Putin policies have already pushed developments towards that direction.