Four weeks later, things have progressed as I expected globally, but I have been wrong about India. The assessment that India will not be affected comes from an incomplete reading of the data. The latest figures indicate something else.
The Consumer Price Index (CPI), which measures retail inflation, has two entries for wheat, wheat/flour-PDS (public distribution system) and wheat/flour-other sources. This takes into account the wheat sold through both PDS and open market. The weighting of the wheat entry for ‘Other Sources’ in the index is 2.56%, which means that wheat forms a significant portion of an average Indian’s overall consumption.
The open market prices for wheat in March rose by 7.77% as compared to March 2021. Data from the Center for Monitoring Indian Economy show only three examples in the current CPI series when wheat prices rose sharply: from December 2016 to February 2017, when prices rose sharply by 8%. Therefore, in March, the price of wheat in the open market increased the fastest in five years. Interestingly, wheat prices in the open market have been rising sharply by more than 5% since January.
When it comes to inflation as measured by the Wholesale Price Index (WPI), wheat prices rose 14% in March. They have been growing at the rate of more than 10% since November. what does this mean? Any price is a reflection of the information taken into account. Clearly, the wheat market believes that there is no wheat as expected.
As of April 1, the total wheat stock in the central pool of FCI stood at 19 million tonnes. This is much more than the required operational and strategic stock of about 7.5 million tonnes. Moreover, in May-June, as soon as FCI procures the rabi crop which will start reaching the wholesale mandis, its wheat stock will increase. Hence, as per the FCI data, there is no shortage of wheat.
So, why have wheat prices gone up? As on 1 April 2021, the stock of wheat in the central pool of FCI stood at 27.3 million tonnes, which is significantly higher than this year. This is because the central government is running a free food grain scheme of 5 kg per month after the Kovid epidemic. This explains why FCI wheat stocks are in decline, even though they are officially overbought.
Also, usually when the prices of wheat (or rice) start rising, the government sells the FCI stock in the open market to cool the prices. This has not happened this year, mainly because of the free food grains scheme. Nonetheless, the FCI has enough stock to do both, and this is something the government should do soon.
Also, let’s look at wheat exports. The total quantity of wheat exported during the financial year 2021-22 from April 2021 to February 2022 was around 6.7 million tonnes. This is more or less the same as the total quantity of wheat exported over a period of 7 years from 2014-15 to 2020-21.
In addition, about 64% of the total wheat exported during 2021-22 was shipped over a five-month period from October 2021 to February 2022. This tells us that countries that do not produce enough wheat once started stocking up. Russia attacked Ukraine increased. Interestingly, Bangladesh has been the biggest wheat-export destination this year, with the country importing 3.8 million tonnes or about 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 that the supply has had a negative impact. Recently, Egypt, the world’s largest wheat importer, announced that it has decided to import wheat from India. Due to this, private wheat traders have stocked wheat from the open market, due to which the prices have increased.
Lastly, our wheat production from Rabi crop is estimated to be around 111.32 million tonnes. Agriculture experts believe that the actual production is likely to be lower by around 10%. Several reasons are being cited for this decline in production, including unseasonal rains, recent high temperatures, shift in cropping pattern away from wheat, among others.
Finally, as long as the war in Ukraine continues, international wheat prices are unlikely to fall. Also, what doesn’t help is that Russia is the world’s largest exporter of fertilizer. And fertilizer prices have risen by more than 40% since the end of January. This will further lead to food inflation in particular and food inflation in general.
Therefore, in order to reduce the prices of this dietary staple, the Government of India needs to release some wheat from the shares of FCI in the open market. In addition, any export commitments must be carefully worked out to ensure that it does not lead to a shortage of wheat in the country.
Vivek Kaul is the author of ‘Bad Money’.