Late reaction

The Centre’s latest decision to completely scrap import duty on wheat was a necessary measure to curb any runaway price increase of this staple food, even as the next harvest is four months away. But there’s a hint of desperation in this move. It follows a reduction in duty from 25 per cent to 10 per cent barely three months ago. It also comes as the rabi sowing of wheat is underway and the Centre has been painting a bright picture of this year’s crop prospects. There’s fear among the farming community that this will trigger a flood of imports from an over-supplied global market, denting realisations.

Wheat and atta prices in domestic markets have been on an upward spiral since May, with these staples currently ruling 25 per cent above last year’s levels. Retail prices of wheat in Delhi spiralled up from ₹20/kg to ₹24/kg in the past three months, while atta soared from ₹21 to ₹26 a kg. This flare-up was anticipated by the wheat trade given the many advance indications of it. After two consecutive years of crop shortfalls, the Food Corporation of India (FCI)’s wheat procurement this year at 230 lakh tonnes was way below its target of 300 lakh tonnes. With strong market demand, the wheat stock in FCI’s Central Pool had dwindled by half between June and December 2016 to a precarious 165 lakh tonnes. But even as markets responded promptly to tighter supplies, the policy response has been quite tardy in coming. Some of the complacency could be due to the agriculture ministry’s rosy estimate of an 11 per cent expansion in the wheat acreage and a comfortable output of 938 lakh tonnes for rabi. But independent agencies peg it at just 870 lakh tonnes. No matter who is eventually proved right, with the harvest set to hit the markets only by April, inflationary trends were bound to persist for another three months, forcing the Centre to act.

However having taken these fire-fighting measures, probably with an eye on upcoming state elections, the Centre will need to closely monitor the influx and tweak duties, so that farmers are not denied a reasonable market for their produce in 2017, after two consecutive drought years. The wheat episode also reiterates that policymakers cannot continue to play down the impact of demonetisation on crop prospects or inflation. To ensure that critical rabi sowing isn’t impacted, farmers will need to be supplied with adequate cash and credit for agri-inputs and labour over the next few months. Yes, the immediate impact of the cash crunch has been to compress consumer demand and temper inflation. But if the cash crunch leads to lower harvests, its second order impact may well be to trigger a supply shock that re-ignites inflation. To head this off, the Agriculture Ministry will need to keep a closer eye on the situation.

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