The Hindu Business Line : Wheat bonus dilemma for Government

Estimates of crop size keep oscillating from time-to-time — from an optimistic 74 million tonnes (mt) to a bullish 71 mt. But the consensus is that the output will fall short of the targetted of 75.5 mt.

Concerned over high prices, the Centre has already initiated a series of measures. Banning wheat exports, releasing intervention stocks and asking large corporates to not purchase from the frontline States of Punjab and Haryana are some of them.

Unofficial fiat

There is no guarantee that the corporates will keep off the market - there are ways and ways of doing business, in order to beat what has now come to be known as government's unofficial fiat.

Be that as it may, in the major-growing regions, wheat is getting ready for harvest. This season harvest is likely to commence much earlier than Baisakhi day (April 14) because of early planting.

The crucial question is how much will Food Corporation of India (FCI) be able to procure this season. The target is set at about 15 mt, while the actual performance remains to be seen.

Given the market conditions and some reservations about FCI's ability to procure 15 mt, some lobbies have made a strong pitch for a bonus.

Already the procurement price is up by Rs 100 a quintal from last season's Rs 650/quintal.

With the procurement price for the season at Rs 750/quintal, the season opening price will be not less than Rs 850-860 a quintal primarily because of high rates of various local taxes (about 11 per cent) that wheat is forced to bear in Punjab and Haryana.

Expectations

Market participants widely expect that the Government would soon announce a bonus of Rs 50/quintal. If the procurement price is raised to Rs 800, then the opening price will correspondingly rise.

At this point of time, its unclear if the Centre is serious about granting a bonus; but either way it must make up its mind without loss of time.

It should avoid repeating what happened last season. Bonus was announced three weeks too late and that delay did contribute to the procurement fiasco.

Also, it may be time to plan for imports. Irrespective of the quantum of procurement, the country would need to import not less than 3 mt, in order to augment supplies and rein-in prices.

The silver lining is that wheat prices in 2007-08 may begin to soften under the impact of anticipated higher production and rising global inventory.

If the rupee continues to appreciate, it would make food imports cheaper.

Quite apart from investigation into whether or not large funds from NBFCs (non-banking financial institutions) are flowing into funding foodgrains purchases for purpose of hoarding, an important aspect of Government strategy would be to ensure that large businesses declare their stocks from time-to-time.

Level-playing field

The logic is clear. If FCI, the country's largest buffer stocking agency declares its stock position in a transparent manner (that information helps the private sector players in their business decisions) regularly, a level playing field would result if other large players too follow suit.

The market participants are concerned about the suspension of wheat futures beyond August. Having taken the decision to suspend and having appointed a committee to examine the effects of futures trading, it may be logical to assume that the Government would review the situation sometime early June, when procurement operations would have ceased, forecast of southwest monsoon would have been out and rains probably set in the southern tip.

Southwest monsoon forecast and onset of rains would surely be the crucial determinants of policy and the fight against inflation. While a decision on bonus brooks no delay, the dilemma is whether or not to give a bonus.

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