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Source– The post is based on the article “Where has India’s record wheat and rice output gone? ” published in the “mint” on 19th September 2023.
Syllabus: GS3- Agriculture
Relevance- Agriculture pricing and marketing
News– The article explains the recent policy steps taken by the government for wheat and rice procurement and marketing and their impacts on inflation
What is the inflation scenario in the country?
Food inflation is unlikely to ease soon, primarily due to persistently high inflation in cereal prices, particularly wheat and rice.
In August, cereals contributed almost as much to the Consumer Price Index (CPI) inflation as tomatoes. It accounted for 15.49% as compared to 15.51% for tomatoes.
In August, rice CPI inflation stood at 12.5%, despite the government’s ban on non-basmati rice exports, the sale of rice from its stockpiles, the imposition of a 20% export duty on parboiled rice, and the establishment of a minimum export price for basmati rice.
What are the recent policy measures by the central government for wheat procurement and marketing?
The government claims there has been a record production of wheat for this year and the previous year.
Despite this, the government has placed bans on wheat exports since May 2022 and on the export of atta and similar products since August 2022.
There are also restrictions on traders, millers, wholesalers, and retail chains from holding more than 3,000 tonnes of wheat. Smaller retailers and shops have a limit of 10 tonnes.
Despite these measures, the government has only managed to procure 26.1 million tonnes of wheat. It is falling short of the current target of 34 million tonnes for the rabi season. These measures did not significantly improve procurement.
It led to widespread of concern procuring wheat at such elevated prices for its free food program.
Purchasing wheat at market rates would have placed an unsustainable burden on the treasury.
To reduce prices, the government sold wheat from its reserves at prices lower than the economic cost.
This strategy succeeded in dragging down market prices to the minimum support price (MSP) level. It resulted in wheat CPI inflation dropping to slightly above 9% by August.
What’s causing this high inflation?
According to an analysis by agricultural economist Ashok Gulati, non-basmati rice exports surged from 1.38 million tonnes in 2019-20 to 6.4 million tonnes in 2022-23.
According to Gulati, these exports occurred at prices lower than the minimum support price (MSP). It is implying that rice from the free food program is leaking out of the country in significant quantities and leading to higher domestic prices.
What will be the impact of any policy missteps at this juncture?
Food inflation and supply disruptions have the potential to spill over into the broader economy.
Elevated retail inflation might compel the central bank to raise interest rates. It will harm India’s economic recovery and increase the government’s already substantial borrowing costs.
This could pose a threat to fiscal consolidation. Furthermore, depressing farmer incomes is counterproductive as it reduces consumption expenditure in the economy.
The most effective way to guard against shortage is to import wheat. This strategy was employed in 2016-17 when the late Ram Vilas Paswan was in charge of food supplies. International wheat prices are currently manageable.