Four weeks later, globally things have moved as I expected, but I have been wrong about India. The assessment that India wouldn’t be impacted came from an incomplete reading of data. Latest data suggests otherwise.
The consumer price index (CPI), which measures retail inflation, has two entries for wheat, wheat/atta-PDS (public distribution system) and wheat/atta-other sources. This takes into account the wheat sold both through the PDS and in the open market. The wheat entry for ‘other sources’ has a weightage of 2.56% in the index, implying that wheat is a significant part of the overall consumption basket of an average Indian.
Open market prices for wheat in March rose by 7.77% over March 2021. Data from the Centre for Monitoring Indian Economy shows only three instances in the current CPI series when wheat prices rose faster: from December 2016 to February 2017, when prices rose faster than 8%. Hence, in March, wheat prices in the open market rose the fastest in five years. Interestingly, open market wheat prices have been rising at faster than 5% since January.
When it comes to inflation as measured by the wholesale price index (WPI), wheat prices rose by 14% in March. They have been rising at a rate greater than 10% since November. What does this mean? Any price is a reflection of information getting factored in. Clearly, the wheat market believes that there isn’t as much wheat to go around as estimated.
As of 1 April, total wheat stocks in FCI’s central pool stood at 19 million tonnes. This is far more than the required operational and strategic stocks of around 7.5 million tonnes. Also, in May-June, as FCI buys rabi harvests that will start reaching wholesale mandis, its wheat stocks will grow. Hence, there doesn’t seem to be any shortage of wheat, as per FCI data.
So, why have wheat prices gone up? On 1 April 2021, the wheat stocks of FCI in its central pool had stood at 27.3 million tonnes, considerably more than this year. This is because the Union government in the aftermath of the covid pandemic has been running a 5kg per month free foodgrains scheme. This explains why FCI wheat stocks are down, even though they are more than what is officially required.
Further, typically when wheat (or rice) prices start going up, the government sells FCI stocks in the open market to cool down prices. That hasn’t happened this year, primarily because of the free foodgrains scheme. Nonetheless, FCI has enough stocks to do both, and this is something that the government should be looking to do soon.
Also, let’s look at wheat exports. The total amount of wheat exported from April 2021 to February 2022 during fiscal year 2021-22, stood at around 6.7 million tonnes. This is more or less similar to the total amount of wheat exported from 2014-15 to 2020-21, a 7-year span.
Further, around 64% of the total wheat exported during 2021-22 was shipped in a period of five months from October 2021 to February 2022. What this tells us is that countries which do not produce enough wheat began to stock up once the chances of Russia attacking Ukraine went up. Interestingly, Bangladesh has been the largest wheat-export destination this year, with the country having imported 3.8 million tonnes, or around three-fifths of the total wheat exported by India.
There has been a lot of talk about India exporting more wheat to help address the global wheat shortage, given that Russia and Ukraine are the world’s largest and fifth largest exporters of wheat and this supply has been negatively impacted. Recently, Egypt, the world’s largest importer of wheat, announced that it had decided to import wheat from India. This has led to private wheat traders stocking up on wheat from the open market, pushing up prices.
Finally, our wheat production from the rabi crop is projected to be around 111.32 million tonnes. Agriculture experts are of the view that actual production is likely to be around 10% lower. Multiple reasons are being offered for this fall in output, including unseasonal rains, recent high temperatures, a shift in cropping pattern away from wheat, among others.
To conclude, international wheat prices are unlikely to fall so long as the war in Ukraine continues. Also, what doesn’t help is the fact that Russia is the world’s largest exporter of fertilizer. And fertilizer prices have risen by more than 40% since January-end. This will further feed into foodgrain inflation in particular and food inflation in general.
Hence, to cool prices down of this dietary staple, the Indian government needs to release some wheat from FCI stocks into the open market. Also, any export commitments must be carefully worked out so as to ensure that it doesn’t end up creating a wheat shortage in the country.
Vivek Kaul is the author of ‘Bad Money’.