Business Today

It takes two to tango

Knowledge is no substitute for native intelligence. Or so it appears, when one takes a look at the goings-on in the wheat business in the country.

By Balaji Chandramouli | Print Edition: October 7, 2007

Knowledge is no substitute for native intelligence. Or so it appears, when one takes a look at the goings-on in the wheat business in the country. Early this month, the government approved import of close to 8 lakh tonnes of wheat at a price of $389.45 per tonne. Earlier in June, it had scrapped a tender to import wheat at a price 30 per cent lower.

That the government read the market wrong is only one part of the story—given the available information on the day, there was little reason to think and act otherwise. In May, the prices were expected to soften—two key wheat exporters, Russia and Australia, were then expecting a bumper crop in the coming months. When both the hopes were belied, the market hardened swiftly.

Wheat farmers

The other half of the story is the farmer’s take on the market. In May this year, when the government stepped in to procure wheat, several farmers in Punjab held out. Faced with a situation of having to raise the procurement prices and increase its food subsidy bill, the government undertook an interesting manoeuvre.

It floated a bid in the market to import wheat, scrapped the bid and then went ahead to extend the procurement season. In parallel, it told large wheat trading firms like Glencore and Cargill to keep off Punjab. The result: the farmers’ hold-out strategy failed. In hindsight, however, their prediction came true.

The import decision, however, will leave a serious imprint on the market. That is because the government’s procurement price sets a key benchmark in the market as it is the single largest buyer in the domestic market, accounting for 15 per cent of the production.

The Indian farmer, who, over the years, settled for a price marginally higher than his production cost of around Rs 5-6 per kilogram, is certainly in for good times (see Wheat Anomaly), partly at the expense of the exchequer, whose food subsidy bill will further rise.

Ironically, this is one of the rare situations where populism has triggered reforms. Here’s how: The decision to import wheat has little to do with food security as the buffer stocks sans imports (given the current consumption trend) will be adequate until next year.

Evidently, it has more to do with the prospects of elections looming large in the near future, when the government can ill afford to have food-related inflation raising its head again, argue government officials. The fear is not unfounded, especially given the recent loss of self-sufficiency in wheat production in the country.

However, in the process, it leaves an indelible imprint on the procurement prices next season. Since wheat has been imported at Rs 16 per kg, the farmer will not settle for the Rs 8.50 per kg that he got this year from the government.

The farmer has tasted the open market, with the government departing from the traditional cost-based remuneration this year and bringing its procurement prices closer to market prices. This is one reform that will cause little pain.

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