Bonus on wheat procurement uncalled for

Madhya Pradesh (MP) has announced a bonus of Rs 150/quintal on wheat procurement for 2013-14 crop on February 3 to woo farmers in that State, over and above MSP of Rs 1,350/quintal. Farmers will be paid Rs 1,500/quintal — an effective hike of 17 per cent over 2012-13.

Last year, MP procured more than 8.5 million tonnes of wheat, and 80 per cent of that is stored in kaccha CAP storages, leading to large wastage (at least 10-12 per cent, if not 20 per cent). This year, the situation will worsen, with rising procurement and mounting stocks, both at an all-India level and in MP.

The Global Agency of International Mechanical Engineers, in a recent report, has said that India wastes 21 million tonnes of wheat each year, more than the annual production of wheat in Australia. Populist policies, such as that adopted by MP, contribute to this huge wastage for ill-conceived political gains. This must end.

UNMANAGEABLE GLUT

There is already a glut of wheat and the 2008-09 crop is still rotting in government stocks. If MP is serious about assisting farmers, it could give a bonus on oilseeds and pulses, which the nation imports, or simply give Rs 10,000/ha to farmers to increase productivity, which will be crop-neutral.

That would have been preferable to this populist bonus of Rs 150/quintal for wheat. The Chief Minister could take a cue from his counterpart in Gujarat, who said at the Shriram College of Commerce, Delhi, that the ‘government has no business to be in business’. Gujarat helps farmers through check-dams, drop irrigation, agri-extension, but no bonus and hardly any procurement, and its agriculture sector has been growing at 10 per cent per annum for the last 10 years!

MP’s initiative may encourage a competitive spirit of bonus disbursal on wheat in other States –Punjab, Haryana, UP, Rajasthan, Gujarat — in an election year. (If UP and Rajasthan do not bestow bonus, wheat of these States may be diverted to MP for better value realisation.) The Finance Ministry could intervene to ensure that procurement should not exceed 25 million tonnes and restrain the States from doling out gratuities and taxes beyond 5 per cent.

The trigger could be budgetary exhaustion, even without the Food Security Bill. Unless the bullet on bonuses and local taxes is bitten now, gratuities on kharif paddy may be showered in the coming months— weakening its parity in export markets. There would be further accumulation of stocks.

Bonuses could have been justified had crop been inadequate, carry-in stocks insufficient and the buffer tonnage in deficit. These three situations do not exist. The nation’s current and fiscal deficits are under strain. Are subsidised seeds, fertiliser, electricity, free water, good weather, loan waivers, tax-free income not enough by way of bonuses to farmers? Are taxation rates of 14.5 per cent in Punjab, 11.5 per cent in Haryana, 9 per cent in UP/Uttarakhand not bonuses to the States from the Centre?

If the traditional policy prescription continues, private sector will be crowded out and the Government will be sitting on high-priced inventory — exporting it much below economic cost, or letting rodents feast on it till it rots.

The Centre is likely to acquire 42-45 million tonnes (mt) of wheat, against 37 mt last year, while the estimated total output may be 94 mt. On an all-India basis, “open air warehousing” for wheat has spiked from 18-27 per cent in the last two years. With wheat stocks at around 60 million tonnes by end-June 2013, about 20 million tonnes will be officially warehoused in inhospitable conditions.

The Government has not come up with an alternative mode of offtake, either domestically or through accelerated exports of at least 10 mt in 2013-14, as recommended by the Commission for Agriculture Costs and Prices in its latest submission to the Ministry of Finance.

After MP’s bonus pronouncement, grain brokers in “other States” are quoting the market price of wheat plus anticipated bonus to exporters, making and private exports unviable.

UNCOMPETITIVE PRICES

South Korea purchased wheat from India at $324/tonne c&f – with f.o.b parity of $304 for April shipment. Working backwards, MP wheat, with an exchange rate of Rs 53 to a dollar, would cost about $20 more. Egypt bought US wheat at $306 fob for February shipment, while Ukraine price for “July/August” delivery is $260 fob. Prices will taper off in future months. With bonus-padded costs becoming unworkable, international traders may opt for other countries.

India will then remain saddled with enormous stocks for three years. Funds at Rs. 20,000/tonne per year for at least 40-50 mt of extra grain, well above the buffer stock norms, costing Rs 80,000 to Rs 100,000 crore, will stay locked in or sunk. Both, the Food and Finance Ministries need to intervene to liquidate stocks and limit procurement from States through bonus or high taxes.

In rice, where India acquired world’s number one exporter status last year, competition from Vietnam and Pakistan is threatening its position. Their quotes are already lower by $15-20/tonne.

China will be a leading importer from these two countries, with Vietnam having a definite edge. Vietnam is showing greater price aggression, perhaps, to capture India’s African market of white rice.

The Thai Government, with ballooning 17 mt rice stocks, can cut its stock “at loss” any moment. With sufficient rice inventories in India, any significant hike in MSP of paddy in the coming kharif crop or bonuses will be inappropriate.

If such policies continue, MP and Rajasthan will stop sowing pulses and oilseeds. Punjab, Haryana and UP will cultivate water-guzzling paddy, amidst environmental concerns.

(The author is a grains analyst.)