ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Wheat Price Inflation in Recent Times: Causes, Lessons and New Perspectives

In this paper we demonstrate that the high level of wheat procurement during 2008-09 and 2009-10 at a higher minimum support price was necessitated by the difficult circumstances that the government faced, characterised by a precarious buffer stock position from 2005 to 2008. Hence, blaming larger procurement and a higher msp alone for the soaring wheat prices between 2008 and 2010 is an oversimplification of the problem. The experience with wheat procurement in the recent past suggests that foodgrain procurement at a lower msp may not always be feasible. Finally, it is shown that the inability of the government to utilise the abundant wheat stocks for the benefit of the consumers during the recent phase of high foodgrain prices was due to the poor offtake of the grain allotted to the states, not to the operations of private trade via the government's open market sales window.

SPECIAL ARTICLE

Wheat Price Inflation in Recent Times: Causes, Lessons and New Perspectives

Sthanu R Nair, Leena Mary Eapen

In this paper we demonstrate that the high level of 1 Introduction

wheat procurement during 2008-09 and 2009-10 at a higher minimum support price was necessitated by the difficult circumstances that the government faced, characterised by a precarious buffer stock position from 2005 to 2008. Hence, blaming larger procurement and a higher MSP alone for the soaring wheat prices between 2008 and 2010 is an oversimplification of the problem. The experience with wheat procurement in the recent past suggests that foodgrain procurement at a lower MSP may not always be feasible. Finally, it is shown that the inability of the government to utilise the abundant wheat stocks for the benefit of the consumers during the recent phase of high foodgrain prices was due to the poor offtake of the grain allotted to the states, not to the operations of private trade via the government’s open market sales window.

The authors are grateful to Kausik Gangopadhyay, an official of the Food Corporation of India and an anonymous referee of this journal for their valuable comments and suggestions on an initial draft of this paper. The usual disclaimer applies.

Sthanu R Nair (srn@iimk.ac.in) and Leena Mary Eapen (leenaeapen@ iimk.ac.in) are with the Indian Institute of Management, Kozhikode.

The issue of high inflation in food prices has been at the forefront of the economic policy debate in India for quite some time now. For the government and policymakers, in terms of identifying appropriate solutions no other domestic economic problem has proved to be as challenging as food inflation. Perhaps for the first time in recent history a sense of helplessness has settled over the government administration in resolving a key economic challenge facing the country. Blunt assessments like “solutions to tackle inflation are not easy” and “there is no magic formula for bringing down inflation” have become all too familiar over the last few years. This is despite several measures – monetary, fiscal, and administrative – initiated by the government from time to time to contain food prices.

The recent phase of high food inflation, measured by year-onyear changes in the wholesale price index (WPI) (Base: 1993-94),1 began with the rising prices of manufactured food products starting from January 2008, followed by food articles from March 2008 (Figure 1, p 61). Whereas the food products price rise lasted for 28 months up to April 2010, inflation of primary food articles continues to remain high (July 2011). Thus, on an annual average basis, the fiscal years 2008-09 and 2009-10 recorded high inflation in food products (Table 1, p 59). On the other hand, the rate of inflation of the food articles group remained unacceptably high for three years running from 2008-09. Notably, in terms of duration and magnitude, the food price spiral witnessed from January 2008 onwards was the longest and largest since April 1995 (Table 2, p 59). One widely debated aspect of this episode of food inflation was the spiralling prices of foodgrains, in particular wheat and rice, amidst a piling up of a grain mountain in government storage depots (Table 1). The central government was in the firing line of criticism from various quarters including the Supreme Court for failing to control wheat and rice prices.

Among the factors responsible for high inflation in wheat and rice during 2008-09 and 2009-10, two systemic problems associated with India’s foodgrain management have received considerable attention. They are the high minimum support price (MSP) offered for foodgrains and high levels of foodgrain procurement by the government (Basu 2011). Whereas the former inflated open market foodgrain prices, the later deprived the private sector of sufficient grain for meeting the requirements of the ordinary consumers, thereby putting additional pressure on grain prices.2 Moreover, the government’s effort to stabilise foodgrain prices by way of selling the buffer stock grains to the open market failed to deliver the desired results. This is because the procurement of

september 3, 2011 vol xlvi no 36

foodgrains at a higher MSP necessitated charging higher price for the foodgrains sold by the government to the open market. As a result, there were no/few buyers for such foodgrains.

Table 1: Annual Average Food Inflation Rate (%) (Based on WPI with base 1993-94 and 2004-05)

Year Food Articles Foodgrains Rice Wheat Food Products
1993-94 2004-05 1993-94 2004-05 1993-94 2004-05 1993-94 2004-05 1993-94 2004-05
2000-01 3.02 --1.47 --2.22 - 1.09 - -3.70 -
2001-02 3.28 --0.81 --0.30 --0.74 - -0.21 -
2002-03 1.76 - 1.10 --0.60 - 0.23 - 5.23 -
2003-04 1.28 - 1.15 -1.69 - 3.24 - 8.95 -
2004-05 2.64 - 0.68 --0.36 - 1.49 - 4.92 -
2005-06 4.83 5.4 5.35 7.2 3.75 5.2 4.02 4.8 1.09 1.2
2006-07 7.78 9.62 10.16 14.12 2.92 4.56 13.05 19.14 3.22 5.29
2007-08 5.46 6.97 4.61 6.92 6.74 11.30 4.25 7.32 4.22 3.54
2008-09 8.02 9.09 8.63 11.02 11.11 14.83 6.16 9.90 10.04 8.69
2009-10 14.72 15.27 15.59 14.49 14.41 12.31 10.73 12.81 16.72 13.49
2010-11 -15.57 -4.78 -5.72 -3.00 - 3.69

- Indicates not available. Source (Basic Data): Central Statistical Organisation (http://eaindustry.nic.in/).

Table 2: Average* WPI Inflation Rate – Food Articles and Products (Base: 1993-94 = 100)

Category and Period Duration (in Months) Inflation Rate (%)
Food articles
April 1995 to April 1997 24 10.41
February 1998 to April 1999 14 11.29
October 2005 to August 2007 22 7.50
March 2008 to August 2010 30 11.85**
Food products
November 1996 to March 1999 28 9.17
February 2003 to April 2004 14 8.56
January 2008 to April 2010 28 12.70

* Average inflation is calculated based on the change in the average value of the WPI over a certain period (e g, January 2008 to April 2010) with respect to the average value of the WPI over the corresponding period (January 2007 to April 2009) the year before. Throughout this paper this method is followed to calculate the average inflation rate for a reference period wherever necessary. ** As per new base (2004-05=100) the average food articles inflation was 13.36% up to March 2011 (37 months). Source (Basic Data): As in Table 1.

The purpose of this paper is twofold. First, it presents a more holistic picture of the role played by the high MSP and government procurement in fuelling wheat prices during 2008-09 and 2009-10 and draws relevant lessons. Second, it offers some fresh insights into the aspect of sale of foodgrains to the open market (or ordinary consumers) by the government in the context of the recent wheat price spiral.

The paper is organised as follows. Section 2 elaborates the circumstances leading to high wheat prices during 2008-09 and 2009-10 and draws lessons which have implications for the fixation of MSP. In Section 3 some new perspectives on the response to open market sale of wheat by the government are presented. Section 4 provides a summary of the paper.

2 Explaining High Wheat Prices

Notwithstanding a positive wheat output for three consecutive rabi marketing seasons (RMS)3 from 2007-08 (April to March) to 2009-10 and negligible wheat exports during the same period, the WPI inflation rate of wheat was ruling high for the most part of the period from April 2008 to August 2010 (Tables 1, 3 and Table 4, p 60). The overall average wheat inflation rate recorded between April 2008 to August 2010 was 8.41%. Ironically, the

Economic & Political Weekly

EPW
september 3, 2011 vol xlvi no 36

wheat stocks with the government consistently remained much higher than the buffer requirement during this period of high inflation, thanks to the phenomenal increase in procurement in RMS 2008-09 and 2009-10 (Figure 2, p 61 and Table 5, p 60). In terms of absolute numbers, the wheat procurement during these two years was the largest since 1973-74 and accounted for 28.12% and 31.45% of the overall wheat production, respectively. In

o rder to arrive a realistic understanding of the causes for high wheat prices during 2008-09 and 2009-10, it would be ideal to examine the circumstances leading to the building up of the huge stock in 2008-09 and 2009-10 and the manner in which the stock was accumulated.

2.1 Depleting Stocks and Low Procurement

The compelling reason for the government to increase wheat procurement and buffer stocks during RMS 2008-09 and 2009-10 appears to be the grim fact that for most part of the period between January 2005 and March 2008, wheat stocks with the government were at precarious levels and on many occasions they were dangerously low and below the prescribed buffer norms (Figure 2). There are two key reasons for this.

The first is the complete mismanagement of the foodgrain economy by the government.4 Between 1998 and 2004 India experienced a phase of mounting wheat stocks (Figure 2) caused mainly by a mindless procurement spree and the decline in per capita consumption of wheat (Chand 2005). Consumption fell due to a sharp hike in the central issue price (CIP)5 of wheat and an increase in the open market wheat prices, both of which were the outcomes of the high MSP prevailing in the 1990s. In order to bail itself out of an administrative and financial burden involved in managing the wheat mountain, in a knee-jerk response the government decided to permit exports of wheat from November 2000 at a heavy discount price equivalent to the targeted public distribution system (TPDS) issue price of wheat for below poverty

line (BPL) families (Hoda in Production of Wheat and Gulati 2007; Raghavan

Table 3: Production and Growth Rate

Year Production Year-on-Year

2006). As a result, India’s

(in Million Tonnes) Growth (%)

exports of wheat grew at

2000-01 69.68

an unprecedented rate bet

2001-02 72.77 4.43

ween 2000-01 and 2005-06

2002-03 65.76 -9.63 2003-04 72.15 9.72 thereby leading to an easing

2004-05 68.64 -4.86 of wheat stocks (Table 4).

2005-06 69.35 1.03 The second and the most

2006-07 75.81 9.32 important reason is that
2007-08 78.57 3.64 for three consecutive years
2008-09 80.68 2.69 from 2005-06 to 2007-08
2009-10 80.80 0.15 wheat procurement on gov-

Source: Department of Agriculture and Cooperation, Ministry of Agriculture, Government of India (http:// ernment account was low agricoop.nic.in/Agristatistics.htm).

irrespective of the size of the crop (Table 5). While the drop in procurement during 2005-06 was attributed to stagnant production and passive government intervention in the grain market6 (GoI 2006; Raghavan 2006), the story for the other two years is complex.

As per the official assessment, the decline in wheat procurement in RMS 2006-07 and 2007-08 was due to the less than targeted production of wheat, lower market arrivals, lower MSP in

SPECIAL ARTICLE

relation to higher ruling market prices, aggressive purchases by the private traders/players including multinational firms, and bullish market sentiments due to low stocks of wheat in the central pool (GoI 2007a, 2008b). Of these, the first two explanations do not stand scrutiny. The wheat production of 75.81 million tonnes (MT) in 2006-07 was not only significantly higher than the previous year figure but also closer to the peak output of 76.37 MT recorded in 1999-2000 (Table 5). What is more, the production of 78.57 registered in 2007-08 was an all-time record until then. Press reports of that time, quoting trade sources, confirm that the wheat arrivals

Table 4: Export and Import of Wheat (in '000 tonnes)

Year Export Import were normal or little more

2000-01 813.49 4.22 compared to the previous

2001-02 2649.38 1.35 years.7

2002-03 3671.25 -Turning to other fac

2003-04 4,093.08 0.46 tors, in RMS 2006-07 and 2004-05 2,009.35 1.39

2007-08 the government

2005-06 746.18 0.49

lost control of its wheat

2006-07 46.64 6,079.56

procurement drive be cause

2007-08 0.24 1,793.21

of the aggressive inter

2008-09 1.12 0.01

vention by the private

2009-10 (P) 0.0293 160.08 P - Provisional. players such as Hindustan Source: As in Table 3.

Liver, Reliance and Cargil India in the grain market

Table 5: Production and Government Procurement of Wheat (in million tonnes) (Chand 2007; GoI 2008a;

Year Production Procurement Procurement

Raghavan 2006). The key

as % of Production

reason for the emergence

1975-76 28.84 4.05 14.04

of this situation appears to

1980-81 36.31 5.86 16.14 1985-86 47.05 10.35 22.00 be the inadequacy of the

1990-91 55.14 11.07 20.08 MSP offered for wheat

1995-96 62.10 12.33 19.86 during RMS 2006-07 and

2000-01 69.68 16.36 23.48 2007-08 in relation to the

2001-02 72.77 20.63 28.35

ruling open market price

2002-03 65.76 19.03 28.94

of the grain which, in

2003-04 72.15 15.80 21.90

turn, induced the farmers

2004-05 68.64 16.80 24.48

to sell their crops largely

2005-06 69.35 14.79 21.33

to private players (Chand

2006-07 75.81 9.23 12.18

2007).8 Table 6 establishes

2007-08 78.57 11.13 14.17

this point. It presents

2008-09 80.68 22.69 28.12 2009-10 80.80 25.38 31.41 available information on

Source: Handbook of Statistics on Indian Economy retail prices9 of wheat 2009-10, Reserve Bank of India.

(monthly average) quoted in two centres, namely, New Delhi and Lucknow, located in the North zone, during the wheat procurement season running from February to June. Three states located in the North zone, namely, Punjab, Haryana and Uttar Pradesh are the major wheat supplying states in India. It is pretty clear that during 2006-07 and 2007-08 procurement seasons, the difference between the average of retail prices during the season and prevailing MSP was much higher compared to the other seasons in recent history (column 10 of Table 6).

The fundamental cause for the higher market price of wheat during the procurement period in RMS 2006-07 appears to be the bullish market sentiment emerging from the low wheat buffer stocks position from January 2005 onwards (Figure 2). Without doubt the announcement of the government’s decision in February 2006 to import wheat on account of the low level of the buffer stock added further fillip to the bullish trend in the market. The factors responsible for higher market prices during RMS 2007-08 were the continued low levels of buffer stocks, substantial increase in MSP and larger wheat imports between July 2006 and March 2007 at higher international prices (GoI 2007a, 2008a).

In this context it is important to point out that possibly after realising the difficulty in meeting the wheat procurement requirement at the prevailing MSP of Rs650 per quintal, the government announced an incentive bonus of Rs 50 per quintal over and above the MSP on 20 April 2006 (Table 7, p 62). However, by this time the procurement operations in the all important North zone had virtually come to an end enriching the depots of the private players as they were quick to respond to the bullish market sentiment (Chand 2007; GoI 2007a). Learning from this fiasco, the government was more cautious in RMS 2007-08. The MSP (inclusive of bonus) for 2007-08 was increased substantially to a historical high of Rs850 per quintal and it was announced well in advance (Table 7). On a year-on-year basis, the hike of Rs 200 effected in the MSP for RMS 2007-08 was the highest since 1975-76. Also, arrangements were made to procure wheat in about 13,895 purchase centres, which was substantially higher than the previous year figure of 9,000 odd centres (GoI 2008b). Despite these efforts, procurement increased only in a limited way in 2007-08 as the disparity between MSP and market prices was still high.

2.2 Consequences of Easing Stocks

The government’s failure to procure adequate wheat and replenish the buffer stock during RMS 2006-07 and 2007-08 had the following repercussions: (a) skyrocketing wheat prices between January 2006 and August 2007, (b) decrease in wheat allotment and offtake under TPDS, and (c) decline in the overall wheat consumption.

(a) High Wheat Inflation: Between January 2006 and August 2007, the WPI inflation rate of wheat measured, on a monthly basis, was in the range of 7.21% to 19.58% with a period average

Table 6: Centre-wise Retail Price of Wheat (Rs per quintal)

Year Centre February March April May June Average MSP Difference
Retail (Rs Per between
Price (ARP) Quintal) ARP and
(February to June) MSP
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
2003-04 Delhi 783 775 760 750 781 769.8 620 149.8
Lucknow 818 758 750 730 769 765 620 145.0
2004-05 Delhi 875 870 855 800 800 840 630 210.0
Lucknow 825 819 745 703 700 758.4 630 128.4
2005-06 Delhi 900 857 836 807 877 855.4 640 215.4
Lucknow 800 767 750 750 780 769.4 640 129.4
2006-07 Delhi 1,089 1,059 1,003 1,000 1,000 1,030.2 650 380.2
Lucknow 1,029 1,057 925 928 956 979 650 329.0
2007-08 Delhi 1,200 1,200 1,175 1,186 1,100 1,172.2 850 322.2
Lucknow 1,200 1,176 1,055 1,000 1,000 1,086.2 850 236.2
2008-09 Delhi 1,298 1,300 1,297 1,269 1,300 1,292.8 1,000 292.8
Lucknow 1,138 1,200 1,130 1,100 1,100 1,133.6 1,000 133.6
2009-10 Delhi 1,300 1,310 1,342 1,382 1,359 1,338.6 1,080 258.6
Lucknow 1,167 1,187 1,212 1,136 1,100 1,160.4 1,080 80.4

Retail prices which are originally in rupees per kilograms were converted into rupees per quintal. Source: Ministry of Consumer Affairs, Food and Public Distribution, Department of Consumer Affairs (Price Monitoring Cell) (http://fcainfoweb.nic.in/pms/average1_web.aspx, accessed on 5 April 2011).

september 3, 2011 vol xlvi no 36

Figure 1: Monthly Movements in WPI Food Inflation Rate (%) from September 2007 to August 2010 (Base: 1993-94)

30 25 20 15 10 5 0 Food articles Food products

9/07 10/07 11/07 12/07 1/08 2/08 3/08 4/08 5/08 6/08 7-08 8/08 9/08 10/08 11/08 12/08 1/09 2/09 3/09 4/09 5/09 6/09 7/09 8/09 9/09 10/09 11/09 12/09 1/10 2/10 3/10 4/10 5/10 6/10 7/10 8/10

Source:(Basic Data) : Central Statistical Organisation (http://eaindustry.nic.in/) Figure 2: Month-wise Wheat Stock in Central Pool from January 2000 to December 2010 (as on 1st of the month)

45

40

35

30

25

20

15

10

5

0 1/ 2000 5/2000 9/2000 1/2001 5/01 9/01 1/02 5/02 9/02 1/03 5/03 9/03 1/04 5/04 9/04 1/05

Source: Food Corporation of India (http://fciweb.nic.in/stocks, accessed on 4 March 2011).

of 11.70%. Knowing that the government was in a predicament and prices would go up in such a scenario, the private traders released their wheat stocks at their will so as to take advantage of the upward price movement (Chand 2007; Raghavan 2006). The import of a huge quantity of wheat at higher international prices aggravated the price pressure.

  • (b) Decline in TPDS Allocation: The precarious buffer stock position throughout 2006 and 2007 resulted in a sharp fall in the allotment of wheat under TPDS and welfare schemes in 2006-07 and 2007-08 (Table 8, p 62). This cut was exercised through r ationalisation of wheat allocation for the above poverty line (APL) category of PDS cardholders (GoI 2009a; GoI 2009b). The offtake of wheat under TPDS also declined in 2006-07 and it was due to reduced lifting by all the beneficiary categories (Tables 8 and 9, p 62). In 2007-08, the offtake under TPDS slightly i ncreased, but it was still lower than in the immediate past. These trends suggest that the rationalisation move had a negative effect on wheat consumption under TPDS in 2006-07, and 2007-08. Most importantly even the offtake by the BPL and A ntyodaya Anna Yojana (AAY)10 beneficiaries, who were not c overed under rationalisation, decreased. This is despite the fact that the CIP was not subject to revision since July 2000 for these beneficiaries. Therefore, other factors such as higher diversion/ leakage of the PDS wheat to open market and erratic supply by fair price shops might have played a role in reducing the lifting.11
  • (c) Decrease in Wheat Consumption: As the combined effect of inadequate wheat procurement, weak buffer stock, high wheat prices and reduction in TPDS allocation and offtake, consumption
  • Minimum buffer norm (million tonnes) Actual wheat stock (million tonnes)

    5/05 9/05 1/06 5/06 9/06 1/07 5/07 9/07 1/08 5/8 9/08 1/09 5/09 9/09 1/10 5/10 9/10

    of wheat declined between 2005 and 2007. On an average basis, per capita availability of wheat for human consumption declined to 155.47 grams per day during 2005 to 2007 from 169.73 grams per day recorded between 2002 and 2004.12

    2.3 Making Sense of Record Procurement

    Looking at the magnitude of the wheat procurement in RMS 2008-09 and 2009-10 (Table 5), one may wonder whether the government had come back with a vengeance in the grain market after experiencing a setback during 2006-07 and 2007-08. Indeed, this appears to be the case. Long-term data (from 1975-76) on MSP offered for wheat reveals that there were no instances of MSP being hiked significantly for three consecutive years as in the case of RMS 2007-08 (increase of Rs 200 over previous season), 2008-09 (Rs150) and 2009-10 (Rs 80). Another effort worth noting is that for wheat procurement during RMS 2008-09, a total of 15,040 purchase centres were operated by the government compared to 13,895 in the previous season (GoI 2009a). Consequently, the wheat buffer stock started improving from April 2008 and soon reached embarrassingly high levels (Figure 2).

    In all fairness, the rather unusually high level of wheat procurement at higher MSP during RMS 2008-09 and 2009-10 must be seen as a consequence of lower procurement during RMS 2005-06 to 2007-08 and its adverse impact on wheat prices, allocation under TPDS, imports and availability for consumption. Had it not been the case of enhanced procurement, food security of the country, in particular of the poor and vulnerable, would have once again been in jeopardy. The positive difference made by higher procurement to food security can be seen from the increase in the allotment and offtake of wheat under TPDS during

    SPECIAL ARTICLE

    2008-09 and 2009-10 (Tables 8 and 9). However, we make this observation with one caveat. While sympathising with the difficult circumstances necessitating high level of government intervention in the wheat market during 2008-09 and 2009-10, we do not underplay the role played by the systemic problems facing India’s foodgrain economy

    Table 7: Minimum Support Prices of Wheat Inclusive of Incentive Bonus (Per Quintal) such as frequent revisions

    Marketing Season MSP

    in MSP, imprudent accumu

    2000-01 580

    lation of foodgrain stocks

    2001-02 610

    and heavy administrative

    2002-03 620

    and financial costs in

    2003-04 620

    curred on stock mainte

    2004-05 630

    nance (Chand 2005; GoI

    2005-06 640 650 2005a; Kumar et al 2007;

    2006-07

    2007-08 850 Virmani and Rajeev 2001)

    2008-09 1,000 in the creation of the cir

    2009-10 1,080 cumstances. In fact, from

    Source: As in Table 3.

    the previous discussion it emerges that a part of the

    Table 8: All-India Allotment and Offtake of Wheat (in million tonnes) reason – high wheat ex-

    Year TPDS Welfare Schemes*

    ports and scaling down of

    Allotment Offtake Allotment Offtake

    procurement in 2005-06 –

    2002-03 38.57 9.78 5.97 4.55

    for the depleting wheat

    2003-04 37.11 10.81 5.82 5.37

    stocks, which caused the

    2004-05 37.44 11.60 4.88 4.11 2005-06 31.60 12.16 3.51 3.50

    crunch situation in 2008 -09

    2006-07 14.57 10.44 1.57 1.33 and 2009-10 was these mal

    2007-08 11.87 10.83 1.91 1.41 adies facing India’s food

    2008-09 14.44 12.53 1.57 1.12 grain management. What 2009-10 21.33 19.02 5.40 1.72 we suggest in this paper is

    * Includes mid-day meal, SGRY, nutrition programme, hostels, Annapurna, NFFWP, defence, etc.

    that considering the fiasco

    Source: Food Corporation of India (http://fciweb.nic.

    associated with wheat

    in/sales/view/5, accessed on 19 February 2011).

    procurement during RMS 2006-07 and 2007-08, it is appropriate to treat the years 2008-09 and 2009-10 as special cases.

    Interestingly, long-term trends in production and government procurement of wheat reveal that the extraordinarily high level of procurement during 2008-09 and 2009-10 was an exception rather than the norm. The only other occasions witnessing such high levels of procurement were RMS 2001-02 and 2002-03 (Table 5). On an average Table 9: Offtake of Wheat under TPDS according

    to Beneficiary Groups (in million tonnes)

    basis, wheat procure-

    Period (April to December) BPL AAY BPL and AAY APL

    ment as a percentage of

    2002-03 6.34 1.64 7.98 1.64

    production hovered be

    2003-04 6.77 1.78 8.56 2.11

    tween 16% and 18% dur

    2004-05 5.16 1.46 6.62 2.16

    ing the decades of the

    2005-06 4.04 1.78 5.82 2.17

    1970s, 1980s and 1990s

    2006-07 3.53 2.12 5.65 1.97

    despite a phenomenal in-2007-08 3.62 2.40 6.01 2.22

    crease in production fig-2008-09* 5.63 3.20 8.82 3.84

    ures (Table 10, p 63). 2009-10 4.59 2.54 7.13 7.12

    * April to March.

    Only during the last dec-

    Source: Annual Report (various years), Department of ade did wheat procure-Food and Public Distribution, Ministry of Consumer Affairs, Food and Public Distribution, Government of India.

    ment witness a significant increase. But still it was only a little less than one-fourth of the production. Long-term growth trends in production and government procurement of wheat reveal a positive association between the two. Periods of high growth of wheat procurement are also periods of high growth of wheat output and vice versa (Table 11, p 63). This suggests that the government’s wheat procurement drive is already in line with changes in production as suggested by Basu (2011). At this juncture, it is important to note that the extent of government intervention in the grain market cannot be captured fully by comparing procurement and total production. A better way is to compare procurement and marketed surplus of the grain, which is nothing but total production sans the part of production held back for own consumption by farmers. However, long time-series information on marketed surplus is not available (Kumar et al 2007). In the case of wheat, available information (see http://agricoop.nic.in/Agristatistics.htm) during 2000-01 to 2007-08 reveals that as a percentage of marketed surplus, wheat procurement was in the range of 18.42%-38.85% with an average of 31.64%. These figures are higher than those emerging (12.18%-28.94%) from Table 5 implying that as a percentage of marketed surplus the degree of government intervention in the grain market is indeed more.

    2.4 Reasons for High Wheat Prices

    Ironically, the phase of an abundant wheat buffer stock coincided with rising wheat prices between April 2008 and August 2010 (Table 1). The period from 2007-08 to 2009-10 witnessed historical peak levels of wheat output (Table 3). Therefore, blaming a supply-shortfall for high wheat inflation flies in the face of logic. Since India’s wheat exports have been negligible from 2006-07 (Table 4), its role in inflation is also ruled out. The larger wheat imports at higher international prices during 2007-08 might have influenced the domestic wheat prices in 2008-09 to some extent. However, imports were not a factor driving the increase in domestic prices in 2009-10 as India imported a negligible quantity of wheat in 2008-09 and 2009-10 (Table 4).

    The manner in which the wheat stock was replenished during 2008-09 and 2009-10 played a pivotal role. As explained above, with the aim of improving procurement, the MSP of wheat was increased substantially for three consecutive years from RMS 2007-08. Needless to say, a hike in MSP of this kind is a sure cause for rising open market price of wheat (Basu 2011; Chand 2005). Also, the historically high levels of procurement in RMS 2008-09 and 2009-10 might have deprived private trade of adequate wheat, thereby causing an increase in the open market price. However, while attributing high wheat prices to these two factors, one cannot disregard the circumstances leading to them as explained above.

    2.5 Lessons from Falling Stock and Procurement

    The experience with wheat procurement and stocking between 2005 and 2008 has the following two key lessons to offer, which have significant relevance in the fixation of MSP.

    First, a prolonged delicate buffer stock position must be avoided as it gives rise to bullish market sentiment due to expectations of an increase in the price. This, in turn, will stand in the way of the government’s procurement plan unless it steers clear of offering higher MSP.

    Second, the failure of the government to procure sufficient wheat in RMS 2006-07 and 2007-08 due to a low MSP suggests

    september 3, 2011 vol xlvi no 36

    that MSP is a double-edged sword: a higher MSP jacks up open market prices and a lower MSP in the active presence of private players invites the risk of lower procurement which, in turn, might deprive the government of adequate foodgrains to meet its commitments. Interestingly, this aspect of MSP was a matter of concern even before the 2006-07 and 2007-08 wheat fiasco as documented in the report of the High Level Committee for Formulating a Long-Term Grain Policy (GoI 2002a). Thus, the feasibility of running a procurement system at a lower MSP, as

    Table 10: Production and Procurement of Wheat (Percentage Share)

    Period Production (in MT) Procurement (in MT) Procurement as % of Production

    1973-74 to 79-80 28.97 5.11 17.63

    1980-81 to 89-90 44.76 8.21 18.33

    1990-91 to 99-00 63.91 10.65 16.66

    2000-01 to 09-10 73.41 17.18 23.41

    1973-74 to 09-10 54.69 10.71 19.58

    Source (Basic Data): As in Table 5.

    Table 11: Production and Procurement of Wheat advocated by Basu (2011),

    (Annual Compound Growth Rate in %)

    appears doubtful under

    Period Production Procurement

    all circumstances. The ex

    1973-74 to 79-80 7.44 15.35

    perience with wheat pro

    1980-81 to 89-90 3.58 2.91

    curement during 2006-07

    1990-91 to 99-00 3.57 3.83

    and 2007-08 suggests

    2000-01 to 09-10 1.89 0.12 1973-74 to 09-10 3.26 4.13

    that the environment will

    Source (Basic Data): As in Table 5. be more conducive to the

    procurement of foodgrains at a lower MSP provided (a) some reasonable level of buffer stock is with the government at the time of procurement,13 and (b) intervention of the private sector

    in the foodgrains procurement market is subdued. In the absence of this scenario, procurement at a higher MSP or prevailing “market rates” seems to be the most likely possibility (GoI 2002a).

    3 New Perspectives on Open Market Sale

    The sale of buffer-stocked foodgrains to the open market is administered through the Open Market Sale Scheme (OMSS).14 Under OMSS, as and when the need emerges, the Food Corporation of India (FCI) resorts to sale of foodgrains at predetermined prices to the open market so as to enhance the supply and moderate the prices. Available evidence, though limited, suggests that the OMSS has the potential to moderate prices provided the market absorbs the grains offered. For instance, it played a useful intervention through the OMSS. For instance, one of the reasons attributed to high inflation of rice during 2007-08 and 2008-09 was the stoppage of rice sale under OMSS in these years due to a not-so-comfortable buffer stock position (GoI 2009a). To assess the overall effectiveness of the OMSS in augmenting grain supply and controlling prices it is appropriate to understand the price fixation and channels of foodgrains distribution under this scheme. Foodgrains are released through the following three channels:

  • (i) Retail Sale: This involves allocation of foodgrains to state governments and union territories (UTs) for distribution to retail consumers. The central government directs the states/UTs to lift foodgrains from FCI and distribute them to retail consumers through their own agencies such as corporations, cooperatives and federations.
  • (ii) Bulk Sale: Under this mode, foodgrains are sold by FCI to bulk consumers like roller flour mills and large processors through open tenders.
  • (iii) Sale to Small Processors: This channel involves sale of foodgrains to the small processors through open tenders or state governments.

    The price of foodgrains sold in the retail sale route consists of the following elements: MSP plus railway freight cost from FCI depot to the state/UT capital plus road freight from rail head to the state capital. In the other two cases, the price comprises the MSP plus railway freight cost from the FCI depot to the state plus carrying (storage and interest) cost. Three major aspects of pricing under the OMSS are worth mentioning. First, foodgrains are supplied at their economic cost and hence no subsidy is involved. Second, MSP is the major factor determining the price of the foodgrains offered under the OMSS. Third, depending upon the differences in the distance (and hence transportation cost) between a state and FCI depot, the OMSS price fixed for each state differs.

    Table 12 provides details of wheat allotted and sold under the OMSS through the three channels of distribution during 2008 to 2011 (up to March). It is evident that the price of wheat offered under the OMSS in each period clearly reflects the MSP applicable to that period and other components specified above. Note

    role in taming the wheat price

    Table 12: Allotment and Lifting Position of Wheat under Various Open Market Sale Scheme

    spiral witnessed between July Scheme and Sale Duration MSP (in Rs) Sale Price Range Allotment (in Lakh Approved for Sale Lifting Lifting Lifting as % of (Rs Per Quintal) Metric Tonnes) (in Lakh (in Lakh as % of Approval 1998 and July 2000. This is evi-Metric Tonnes) Metric Tonnes) Allotment

    dent from the fact that the peri-

    Retail Sale ods of easing wheat prices September 2008 and February 2009 1,000 1,021 to 1,381.73 9.09 NA 0.74 8.11 NA (2001-02 and 2002-03), have October 2009 and March 2010 1,080 1,099.28 to 1,518.43 22.40 NA 5.37 23.98 NA January 2011 and June 2011 1,100 1,099.28 to 1,587.57 10 NA 0.14* 1.43 NA

    witnessed substantially higher

    Bulk Sale

    offtake (48.47% and 35.82%,

    October 2008 and March 2009 1,000 1,021 to 1,181 14.69 12.13 11.86 80.74 97.77

    respectively) of wheat under

    October 2009 and March 2010 1,080 1,239.89 to 1,728.18 18.71 14.66 14.59 77.98 99.57 OMSS from the central pool (GoI January 2011 and February 2011 1,100 1,239.89 to 1,728.18 10.84 6.02 5.54 51.13 92.10

    2002b; GoI 2005b). Besides this, Small (private) traders there were occasions when the

    August 2010 and December 2010 1,080 1,239.89 to 1,728.18 4.12 NA 0.03 0.66 NA

    January 2011 and June 2011 1,100 1,239.89 to 1,728.18 1.30 NA 0.28* 21.92 NA

    foodgrain prices could not be

    * - As on 14 March 2011; NA - Not applicable. stabilised for want of market Source: Compiled from FCI (http://fciweb.nic.in/sales/view/7, accessed on 15 March 2011).

    EPW

    SPECIAL ARTICLE

    importantly that the final retail price charged by the sellers would be higher than the price specified in Table 12, depending upon the seller’s distribution cost, profit margins and value additions. This observation brings to light one more key factor responsible for high wheat inflation experienced during 2008-09 and 2009-10: a high MSP necessitated a higher price of wheat sold under the OMSS which, in turn, flared up the open market wheat price. Interestingly, a similar argument was made persuasively by Basu (2011) using a theoretical framework. Our effort in this paper substantiates his argument.

    However, when it comes to the offtake of wheat offered under the OMSS at higher prices, we found stark differences across the three channels of distribution. Whereas the lifting by the state governments and UTs and small private traders was abysmally low, in the case of private bulk consumers/traders it was considerably high (Table 12). Between 2008 and 2010, the offtake of wheat under the bulk sale route ranged from 77.98% to 80.74% of the allotment and 97.77% to 99.57% of the wheat approved for sale by the High Level Committee of FCI through the tender process. On the other hand, the lifting under the retail route was only in the range of 8.11% to 23.98% of the allotment. The main conclusion emerging from these trends is that the lifting of wheat was quite low under the OMSS involving the state governments/ UTs during 2008-09 and 2009-10.15 This clearly shows that the states/UTs and their agencies were unable to augment wheat supply in the open market during the recent phase of high wheat inflation. On the other hand, higher offtake has occurred under the bulk sale route despite the higher price charged for the private traders in comparison to retail sale and the cumbersome guidelines followed for sale to bulk consumers.16 We propose three possible reasons for the low offtake by the state governments/

    17

    UTs under OMSS.

    First, as pointed out by Basu (2011), the price charged for foodgrains offered under the OMSS might be prohibitive for the states. Unlike bulk consumers, the states do not have the leeway to sell the grains at a higher price because such a price may not be “politically” feasible for them. If the states prefer to supply grain at a lower price, the additional financial burden should be borne by them. On the other hand, the bulk consumers by and large cater to the high-end segment of the market which enables them to sell at a higher price. Examples are large private firms producing branded and packaged atta.

    Second, the states and their agencies have an archaic and inadequate storage, processing, marketing, distribution and funding system when compared to the private traders. This limits their capacity to sell the wheat to the consumers in superior forms, say, for example, as packaged flour, and operate on a large scale so as to serve more consumers.

    Third, the low offtake by the states can be attributed to the sheer inefficiency of the state-level distribution machinery. We found many instances to support this view from the FCI’s brief on OMSS.18 For example, during September 2008 to February 2009 the Ministry of Consumer Affairs, Food and Public Distribution communicated to the states and UTs that in case they require additional allocation of wheat under OMSS the same should be communicated to it. The ministry also allowed conversion of wheat into flour for distribution to retail consumers and sale of wheat to small-scale wheat processing units. Despite all these initiatives, the offtake was only 8.11% of the allotment (Table 12).

    The above discussion reveals that the price of the foodgrains offered under the OMSS matters in determining only the offtake by the state governments/UTs. As such, the conclusion arrived by Basu (2011) that the response to government’s grain sale initiative was poor applies mainly to those sales channels which are executed through the state governments. Another interesting aspect is that, other than price, the capacity, ability and efficacy of the agency involved in distributing the foodgrains to ordinary consumers matters in determining the offtake under the OMSS. Clearly, the states/UTs and their agencies do not seem to have these attributes.

    4 Summary

    In this paper, we have shown that the unusually high level of wheat procurement during 2008-09 and 2009-10 at higher MSP was necessitated by the difficult circumstances facing the government. Between January 2005 and March 2008, wheat stocks with the government depleted steadily due to mismanagement of the foodgrain economy during the early 2000s and low procurement for three successive years from 2005-06. The principal reason for the poor procurement was the less than adequate MSP compared to the then prevailing high market prices, which induced the farmers to offer their wheat to private traders. The low procurement has ultimately jeopardised the country’s food security in the form of skyrocketing wheat prices, a decline in wheat allotment and lifting under TPDS and an overall fall in wheat consumption. Notably, it was due to the higher procurement in 2008-09 and 2009-10 that the government was able to restore adequate availability of wheat for the commitments under the TPDS. Hence, an indictment of higher procurement alone for the spiralling wheat prices during 2008-09 and 2009-10 is nothing but an oversimplification of the whole issue.

    The experience with wheat procurement between 2005 and 2008 brings to our attention the dangers associated with low government procurement and stock at a time when larger procurement and stocking are subject to intense criticism. It also offers two key lessons. First, among others, the government’s grain buffer stock position matters in the fixation of MSP. This is because open market foodgrain prices are vulnerable to the stock position which, in turn, may necessitate a suitable correction in the MSP. For example, a weak buffer stock situation gives rise to bullish sentiment in the open market, thereby requiring a higher MSP. Second, in the presence of active private sector participation in the foodgrain market the government has every chance of being driven out of the market by the former unless countered by a higher MSP. The possibility of such a scenario is more in the coming years as agribusiness, food processing industry and organised retail are poised for much faster growth due to various favourable factors.19 The implication of these lessons is that procurement of foodgrains at a lower MSP may not always be easy. For it be a possibility (a) the buffer stock position of the government should not be way below the minimum

    september 3, 2011 vol xlvi no 36

    norm at the time of procurement, and (b) grain purchase by the distribution system at the state level. In contrast, the private sector private sector must be small. has played an encouraging role in augmenting wheat supply in the

    The major factor contributing to the failure of the government open market through higher prices. The implication is that the to make use of the abundant wheat stocks for augmenting open price of the foodgrains offered under OMSS is only partly responsimarket supply during 2008-09 and 2009-10 was the poor utilisa-ble for determining the overall effectiveness of the OMSS in terms tion of the grain allotted to the states/UTs under OMSS. This was of enhancing the open market foodgrains supply. Other factors attributed to the higher price of wheat offered for sale and such as the capacity, ability and efficacy of the agencies involved in inadequacies and inefficiencies associated with the foodgrain executing the OMSS at the micro level have important relevance.

    Notes unchanged, as was the case in 2006-07 and – (2005a): “Performance Evaluation of Targeted 2007-08, the incentive for diversion of PDS grain Public Distribution System (TPDS)”, Programme

    1 Since the primary focus of this paper is on

    to open market would be more. Evaluation Organisation, Planning Commission, 2008-09 and 2009-10 and the policy decisions

    12 See http://agricoop.nic.in/Agristatistics.htm New Delhi, accessed on 13 February 2011(http:// and debates prior to the release of new WPI planningcommission.nic.in/reports/ purport/

    13 If the stock position is weak the market, knowing

    series in September 2010 were based on old sepeo/peo_tpds.pdf).

    the government’s position, would expect higher

    ries with 1993-94 base, in this paper we make

    support price for grains. – (2005b): Annual Report 2004-05, DFPD (MCAF use of inflation figures measured using the old PD).

    14 The discussion that follows on OMSS draws heavily flation emerging out of both the series do not dif-

    WPI series. However, the broad trends in food in

    on our discussion with the FCI officials and the – (2006): Annual Report 2005-06, DFPD (MCAF fer significantly except for some variations in

    FCI document titled “A Brief on Open Market Sale PD). magnitude.

    Scheme (Domestic)”, accessed on 1 April 2011 – (2007a): Annual Report 2006-07, DFPD (MCAF (http://fciweb.nic.in//upload/Open-market/A% PD).

    2 Foodgrains reach the final consumers through four major channels, namely, the targeted public

    20Brief%20 on%20OMSS(D)_1.pdf). – (2007b): Tenth Five-Year Plan 2002-07, Planning distribution system (TPDS), welfare schemes,

    15 Due to this the overall wheat offtake under OMSS Commission. government sale to the open market and private from the central pool was low in 2008-09 (8.29%) – (2008a): Economic Survey 2007-08, Ministry of trade. By and large, grain supply under TPDS Finance.

    and 2009-10 (7.33%). and welfare schemes caters to the needs of the 16 For details about the guidelines, see FCI brief on – (2008b): Annual Report 2007-08, DFPD (MCAF poor and vulnerable. Others, who may be cate-OMSS. PD).

    gorised as ordinary consumers, meet their grain 17 Discussions with the FCI officials were extremely – (2009a): Annual Report 2008-09, DFPD (MCAF requirement through the other two channels useful in formulating these views. PD).which together form the open market for 18 For more details, see pages 3-4 and 12-14 of the – (2009b): Economic Survey 2008-09, Ministry of

    foodgrains. brief.

    Finance.

    3 The wheat crop is grown between October and 19 The change in dietary pattern of Indians towards – (2010a): Annual Report 2009-10, DFPD (MCAF December every year. The crop is harvested value added and high-value farm products has PD).between February and June the next year. made agriculture more attractive to the private

    – (2010b): Economic Survey 2009-10, Ministry of 4 The crux of the distortions caused in foodgrain sector (Dev and Rao 2005; Gulati 2007; Rao and

    Finance. prices in India lies in the way the foodgrain econ-Dasgupta 2009). Several states and UTs have

    – (2010c): “Discussion Paper on Foreign Direct omy has been handled. Imprudent piling up of already amended their Agricultural Produce Mar-Investment (FDI) in Multi-Brand Retail Trading”, foodgrain stocks in government warehouses at keting Committee Acts to permit buyers to pur-Department of Industrial Policy and Promotion, higher MSP inflates grain prices, reduces availa-chase directly from farmers in line with the Model accessed on 11 April 2011 (http://dipp.nic.in/Dis

    bility of foodgrains in the open market for con-Act 2003 proposed by the central government cussionPapers/DP_FDI_Multi-Brand Retail Tradsumption and private trading, and causes heavy (GoI 2010b). The proposal to permit foreign direct ing _06July2010.pdf).

    administrative and financial obligations to the investment into multi-brand retailing is under – (2011): Economic Survey 2010-11, Ministry of Finance.

    government for the maintenance of the food serious consideration (GoI 2010c). There have Gulati, Ashok (2007): “Agribusiness” in Kaushik Basu stocks which, in turn, compels the government to been strong calls for allowing greater private sec

    (ed.), The Oxford Companion to Economics in India

    charge higher price for its grain. For details see tor participation in the procurement and distribu(New Delhi: Oxford University Press), pp 6-8.

    Chand (2005); Hoda and Gulati (2007); Raghavan tion of foodgrains (GoI 2007b; Kumar et al 2007; (2006). Virmani and Rajeev 2002). The task of fixing the

    Hoda, Anwarul and Ashok Gulati (2007): WTO Negotiations on Agriculture and Developing Countries

    5 CIP is the price at which foodgrains are supplied MSP and procuring foodgrains might turn out to under TPDS. be more challenging for the government if all

    (New Delhi: Oxford University Press). these developments reach their logical end of Kumar, A Ganesh, Ashok Gulati and Ralph Cummings 6 To prevent further accumulation of wheat more private sector participation in India’s food Jr (2007): “Foodgrains Policy and Management in stocks, the government has stepped back from

    economy. India: Responding to Today’s Challenges and Opprocurement operations so as to give way for portunities”, accessed on 5 April 2011 (http:// the private traders to procure wheat directly www.igidr. ac.in/ pdf/ publication/PP-056.pdf).

    from the farmers (Raghavan 2006). However, the official position suggests that on govern-References

    Raghavan, M (2006): “Wheat Imports: Food Security ment’s part more effort has gone into wheat pro

    or Politics”, Economic Political Weekly, 41(21): Basu, Kaushik (2011): “India’s Foodgrains Policy: An 2057-59.

    curement during 2005-06 (GoI 2006). For instance, during the RMS 2005-06 arrangements Rao, N Chandrasekhara and Sukti Dasgupta (2009):

    Economic Theory Perspective”, Economic Politiwere made to procure wheat in about 9013 “Nature of Employment in the Food Processing Sec

    cal Weekly, 46(05): 37-45. wheat procurement centres compared to 8,229 Chand, Ramesh (2005): “Whither India’s Food Poli-tor”, Economic Political Weekly, 44(17): 109-15. during RMS 2004-05. cy”, Economic Political Weekly, 40(11): 1055-62. Virmani, Arvind and P V Rajeev (2002): “Excess Food

    7 See for example, “Wheat Prices a Tad above MSP – (2007): “Wheat Supply, Price Prospects, and Food Stocks, PDS and Procurement Policy”, Planning as Arrivals Begin”, The Hindu Business Line, Security”, Economic Political Weekly, 42(19): Commission Working Paper No5/2002-PC,acce 5 April 2006. 1659-63. ssed on 20 February 2011 (http://planningcom

    8 There is also a political economy point of view Dev, S Mahendra and N Chandrasekhara Rao (2005): mission.nic.in/reports/wrkpapers/wp_pds.pdf). which suggests that the private traders have pro-“Food Processing and Contract Farming in cured large quantities of wheat with the full con-Andhra Pradesh: A Small Farmer Perspective”, sent of the government (Raghavan 2006). The Economic Political Weekly, 40(26): 2705-13. government allowed this to prevent further accu-

    Government of India (GoI) (2002a): “Report of the mulation of wheat stocks.

    High Level Committee on Long Term Grain Policy”, 9 The ideal variable for this analysis is wholesale Department of Food and Public Distribution, available at prices. In the absence of detailed information, we accessed on 30 April 2011 (http://fcamin.nic.in/ make use of retail prices. dfpd/EventListing.asp?Section=High%20Level S Thanu Pillai 10 The AAY scheme caters to the needs of the selected % 20Committee%20Reportid_pk=12 Parent

    T.C.28/481, Kaithamukku

    2.43 crore poorest of the poor families from ID= 0).

    Thiruvananthapuram 24

    amongst the BPL families (38% of BPL) covered – (2002b): Annual Report 2001-02, Department of under TPDS (GoI 2010a). Food and Public Distribution (DFPD) (Ministry Kerala 11 In an environment in which open market prices of of Consumer Affairs, Food and Public Distribu-Ph: 2471943 wheat were ruling high and CIP of wheat was kept tion) (MCAFPD).

    Dear reader,

    To continue reading, become a subscriber.

    Explore our attractive subscription offers.

    Click here

    Comments

    (-) Hide

    EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

    Back to Top