Aspects of India's Economy No. 42

Wheat Imports – A Tool for Re-shaping India’s Agriculture
V. Under the Import Regime

Knowing that wheat imports in the given situation would signify a deliberate move towards an import regime, the Government made the decision to import in a conspiratorial and suspicious fashion. By June 2005 the total wheat procured in that season was publicly known, as were the annual requirements of the PDS. No unexpected withdrawal was made from the stocks in the course of the year. Thus throughout the year the Government had a clear idea of the low stock position.

Then, on February 2, 2006, with no unusual offtake in the interim, and less than two months before procurement, Pawar announced imports.

Foreign firms long in the know
The fact is, soon after the deliberately low procurement of April-May 2005, US and Australian multinationals began “predicting” that India would import substantial amounts. The US Department of Agriculture stated in July 2005 that India was expected to import one million tonnes of wheat. By November 2005, leading US analysts predicted that India would import two million tonnes.

The Australian Wheat Board (AWB) too was clear that India constitutes an attractive long-term market, and began investing in physical assets such as warehouses. According to the AWB, given the slow growth of India’s farm sector, “there will be a gap between demand and supply of agri-commodities [that is, there will be a shortage]. By doing opportunity-based imports and exports, AWB can become a serious participant.”²⁶

Do foreign exchange reserves constitute food security?
In a key 1991 document, the World Bank claimed that “High levels of buffer and working stocks for wheat and rice (currently 19 million tonnes) are both expensive and unnecessary, especially in the light of changing objectives for market interventions and a new role for FCI. India could be adequately protected with a smaller buffer stock, entering the world market to obtain supplementary supplies in prior production years and keeping foreign exchange to handle purchase in deficit years.”²⁷

If large foreign exchange reserves constitute food security, then indeed India should be food-secure. At the start of April 2006 the foreign exchange reserves were $152 billion; they rose by June 2006 to $163 billion, and continue to rise. Yet the actual exercise of imports has been fraught with peril.

Three problems emerged in the process of the imports: the failure of successive tenders, and the slow pace of actual imports; the dilution of food and plant safety norms under pressure from foreign suppliers; and the price of the imports.

Although the size of the gap in required wheat stocks was evident at the outset, the Government at first announced in February 2006 that it would import 0.5 million tonnes of wheat. The tender was awarded to the Australian Wheat Board (AWB), much to the resentment of US firms, who lobbied furiously for further imports. On March 13 the Indian Agriculture Minister declared: “My policies are not decided by American agriculture. Our present decision is to import only 5 lakh (0.5 million) tonnes.”

In the third week of April, the Government announced its intention to import another three million tonnes. However, only two out of eight bidders for this tender fulfilled the conditions of the tender, and the Government was able only to import 0.8 million tonnes. A fresh tender for 2.2 million tonnes was issued in June; another in July for 0.4 million tonnes (of which it was able to import 0.33 million tonnes); and one more in August for 1.67 million tonnes. The actual arrivals were much slower: by June only 91,000 tonnes of the first tender had arrived; by the third week of September a total of 1.2 million tonnes. Indeed, as world wheat supplies tightened, it became increasingly difficult for the Government to arrange supplies quickly.

Dilution of norms
International grain traders used India’s helplessness to extract better terms. For one, they demanded, and obtained, repeated relaxations of the quality norms for wheat imports with regard to pesticide levels and the presence of pests, weeds and diseases. The purpose of these norms is to ensure that the grain is fit for human consumption, and that various pests, weeds and diseases absent in India not be allowed to spread to Indian wheat. The latter would seriously harm its food security.

The first tests of the first shipment of Australian wheat showed unacceptably high pesticide levels, leading to prolonged negotiations which greatly delayed the actual arrival of the contracted wheat. Meanwhile, the US and other importers objected to the norms prescribed for the first tender, which they claimed had prevented US firms from bidding. In April itself the US ambassador met India’s Cabinet Secretary to demand that the norms be relaxed.

In May the Indian government reportedly showed US authorities an advance draft of the newly revised plant health norms before they were officially announced. The Bush administration suggested substantial easing of norms for weevils (grain-eating beetles), fungal diseases, and weeds. It also objected to the requirement of fumigation with methyl bromide which the Indian government demanded in order to eliminate particular pests found in the US but not in India. The US Department of Agriculture spokesman, Ed Lloyd, asserted that Indian wheat imports were “something we’re very aggressively involved in. What we’ve been trying to do is open more markets for US agricultural products and wheat in India is a very important market.”²⁸ Canada, the European Union, Russia and Australia also pressed for revision of the norms.

Although the Government relaxed import norms substantially in May at the behest of exporting countries, it continued nevertheless to face pressure for further revision. The US Deputy Trade Representative met Indian officials in May, and the US agriculture secretary pressed his case on Indian Agriculture Minister Sharad Pawar’s visit to Washington in June. The June tender thus further relaxed the norms to allow 100 banned quarantine weed seeds per 200 kg of samples from a single consignment.

Yet the Indian government found it difficult to make the required imports with even these relaxed standards. It decided in August to allow wheat imports even if they failed to meet the quality or phytosanitary norms specified in the import tenders. The Agriculture ministry only ordered that “If the plant quarantine officials find that the level of infestation of the import consignments of wheat warrant their milling in order to prevent the establishment of quarantine pests in the country”, they should direct the importers “to ensure that the consignments are milled at the earliest...” The importers would not be allowed to store or transport it through major wheat growing regions unless it were milled.

However, it is doubtful that the existing Government machinery can enforce any such order effectively, and agricultural scientists raised objections to this relaxation, which was reportedly carried out specifically to allow US participation in the tender.²⁹ Speaking of the relaxation of norms for the first instalment of imports, a leader of the Congress farmers’ front, Krishan Bir Chaudhury, complained: “We spent crores [tens of millions] fighting a single weed (parthenium, or congress grass) that came with Mexican wheat. And now we have got 12 weeds to oblige AWB.²⁰

There are schools of thought that delink the issue of food security from the self-sufficiency in food production and articulate that the level of India’s foreign exchange reserves is a permit to acquire food security through imports.... The scenario of wheat economy in the season 2005-06 has not only exposed the vulnerability of much acclaimed sustainable food security of the country, it had dislocated the price stability of this essential item of mass consumption in the country. It has also demolished the premise articulated by several thinkers that India’s healthy foreign exchange reserves is a guarantee for the nation’s food security.

Rising import prices
India’s annual consumption of wheat is 70-plus million tonnes a year, and world trade in wheat is projected to be 110 million tonnes in 2006-07. Clearly, if India were to import a significant share of its requirements of wheat, it would have an impact on world wheat prices. Indeed, international wheat prices began climbing in 2005 itself, when it was evident India would have to make large imports, and continued to climb steeply through 2006. (See Table 5 and Chart 1)

Commodity	Apr-June 2005	July-Sept 2005	Oct-Dec 2005	Jan-Mar 2006	Apr-June 2006	July-Sept 2006
Wheat, Canada	191	194.9	203.5	208.9	212.1	215.4
Wheat, US HRW	142	151	164.5	173.8	189.6	196.1
Wheat, US SRW	132.1	130.3	135.1	145.4	144	153
Source: World Bank, Commodity Markets Review, June 2006, October 2006.

Thus the prices at which India imported rose by more than $50 per tonne, or 28 per cent, between the first import tender and the fifth. The CPI(M) alleged that the last tender, for 1.67 million tonnes, was concluded at Rs 13,000/tonne, or $289/tonne, rather than $229 as stated in news reports. At any rate, even at $229, the price would be Rs 10,300/tonne, as compared to Rs 6,500-7,000 offered to Indian peasants. The average price for the entire 5.5 million tonnes (again taking price of the last tender as $229) is $206.38/tonne, or Rs 9,287/tonne.

Booked in	Quantity (mn tonnes)	Price ($/tonne)
February	0.5	178.75
May	0.8	193.00
June	2.2	198.00
July	0.33	213.00
August	1.67	229.00
Source: Business Standard, 13/9/06.

Are imports cheaper?
The Government has advanced the strange argument that the landed price of wheat imports in south India is lower than the price of Indian wheat when transport, storage, and taxes are taken into account. The full cost of Indian wheat transported from the north to the south, the Government claims, would amount to Rs 10,308/tonne. However, the Government’s argument seems untenable.

(i) Handling, storage, administrative and interest costs would be similar for domestic and imported wheat. Transport costs alone would differ, though even imported wheat would have to be transported to destinations within the south. (In fact, Brinda Karat has released details showing that much of the imported wheat has been despatched to destinations outside south India; in that case transport costs for imported wheat presumably would be identical to those for domestic wheat.)

How much are the transport costs? A break-up of the FCI’s costs per tonne of wheat (the “economic cost”) is available uptil 2001-02 in the Report of the Committee on Long-Term Grain Policy. Of the economic cost of Rs 8,713/tonne, all transport costs accounted for less than Rs 608/tonne. Since this is an average cost for the whole country, we could liberally take it at double, or over Rs 1200/tonne, for south India. Even at these transport costs domestic wheat would be cheaper.

(iii) Moreover, the quality of the imported wheat compares poorly with that of domestic wheat. As mentioned above, quality norms have had to be repeatedly relaxed in order to meet the import target. Clearly, one cannot compare the prices of different qualities of wheat.

(iv) The above confirms what commonsense would tell us, namely, that domestic wheat is much cheaper than imported wheat (this despite the subsidies provided in countries like the US to wheat). But further, even were imported wheat to be of comparable quality and cheaper than domestic wheat, it should be obvious that purchasing domestic wheat puts purchasing power in the hands of Indian peasants and benefits the Indian economy, whereas consumption imports are a drain on the economy.

Thus the imports were justifiable on neither purely commercial considerations nor on wider economic ones. That they were carried out underlines the political grip of the imperialist countries on the Indian State.

The peril of import dependence is underlined by the fact that international supplies are projected to remain tight, and prices high. The International Grain Council estimates world wheat output in the year July 2006-June 2007 will be 33 million tonnes lower than last year. Closing stocks are set to fall 21 million tonnes, and the ratio of stock-to-use is likely to be the lowest for three decades. Although this is in part because of a severe drought in Australia and a production shortfall in Ukraine, it is in line with longer-term trends which suggest that production will lag behind consumption for the next decade.

Domestic prices – at the mercy of hoarders
Despite the additional supply obtained through imports, domestic retail prices have remained high through the whole of 2006. Wholesale prices were volatile and on the whole considerably higher than in 2005. Whereas the normal pattern is for prices to fall at the time that grain comes to the market, this year prices rose during that very period, as it became evident that public procurement had failed and that the corporate sector had managed to corner a large share. Trading volumes on the futures market too rose sharply in this period. According to the CACP, “The price volatility of wheat futures during April-June may be due to speculative market functioning, more than what normally should be for business decision.... While state procurement was modest, the reports of pro-active market penetration of private and corporate players kept the market sentiments upbeat.”

Domestic hoarding had been facilitated by the Centre’s removal (in June 2002) of curbs on distribution and storage of wheat and pulses under the Essential Commodities Act (ECA), 1955. The new element this year was that not only private traders, but large corporate firms, were hoarding wheat.

Mass discontent, pressure on Congress leadership
High prices generated mass discontent, as can be seen from the fact that senior Congress leaders began to demand intervention by the Government. At a July 2006 meeting convened by Sonia Gandhi, all 12 Congress chief ministers demanded that the Prime Minister temporarily stop futures trading in politically sensitive commodities such as wheat, at least till the U.P. elections were over.

Under this pressure, on August 25, the Government revalidated the orders for control and curbs on distribution and storage of wheat (that had been rescinded in 2002). In September the Maharashtra government placed a ceiling of 150 tonnes on wheat stocks held by traders in Mumbai and Thane, and 50 tonnes for those in the rest of the state, and the Karnataka, Gujarat, A.P., M.P. and Rajasthan governments said they were considering similar moves.

These measures indicate that the Government was aware of the extent of hoarding. However, the Government does not appear to have been implemented the measures seriously, which thus had little effect on prices. Later, successively stricter curbs on the futures market in wheat (increasing step by step the total margin to be paid on wheat contracts, lowering the limits on positions taken, narrowing the limits on daily price fluctuations, and lengthening the “cooling period” after prices hit the daily limits) did have some effect.

26. “AWB to be the first MNC to step into farm retail here”, Economic Times, 9/12/05. (back)

27. World Bank, India: Country Economic Memorandum, vol. II, Agriculture: Challenges and Opportunities, 1991. (back)

31. The government has also allowed private traders to import wheat at zero duty till February 28, 2007, and at five per cent duty from then till March 31, 2007, on the plea of easing supplies. (back)


No. 42, December 2006