Tuesday, December 13, 2016



Tejinder Narang
Contrary to the general perception that zero import duty on wheat notified by Government on 8th December2016 will hurt interests of Indian farmers, it will in fact benefit them. In April-June2017, (at Rabi harvest time), FCI/State agencies have to build up stocks by adding 32-33 million tons (mts) purchases from farmers because reserves are disappearing rapidly. Thus over-riding emphasis for buying locally will be vital. If this target of 32-33 million tons is not achieved, wheat import on Government account may have to be considered.  Procedurally Government’s import through tenders is long and cumbersome exercise with concerns of post contractual controversies on prices and timing, which is avoidable if import is undertaken by private sector at zero duty. Government can then concentrate on local procurement and service PDS requirement without resorting to imports –leaving that to the privates
 Zero duty will be advantageous to consumers, importers and also the Government too. International prices are cheap (14 pkg landed in south India)—lower than Indian MSP (16.25pkg ex North India). Thus decision to reduce duty to nil is rational and timely.
 The specifics as to why duty is made zero, need to be briefly elaborated.  Though Government has consistently claimed Indian wheat output of 2016-17 at 93.50 mts, market players estimated production not exceeding 84 mts. FCI/State agencies were able to procure only 23 mts against target of 28-29mts. Local prices, immediately after the harvest (in May-June 2016), started firming up specially in South India where wheat is relatively more expensive due to high incidence of local handling /freight from North (Ludhiana-Panjab) to say Cochin/ Mangalore, Tuticorin. Millers in South also felt that sufficient produce of Madhya Pradesh was not available to meet their needs. FCI  tapered down sale of the grain in the open market indicating tightness of cereal, with the Centre. This bolstered the speculative sentiment of bullishness in price. 
Import window of wheat on Open General License (OGL) was available. Importers commenced procurement from Australia initially around $225-240 cif (landed at East coast Indian ports), and thereafter from Ukraine/Russia/France/ Bulgaria around $200-210 cif.
Government imposed custom duty of 25% in June 2016 to limit imports, without realizing higher demand pull and lower stocks in central pool. Imported grain’s cost with 25% duty was estimated at par with Indian wheat in the South at Rs 19-20 pkg against MSP of Rs 15.25 pkg.
Cargos of about one mts of imported wheat arrived by August- September 16. (Analysts believe 60% tonnage came from Ukraine; 30%from Australia and balance 10% from other origins.) They were warehoused in custom bonded facilities, in anticipation of Government reducing duty to 10%.  This was done in September 16. This dispensation sweetened deals, both for importers and millers with reasonable margins. Trade also contracted additional one mts after September 2016 from above stated origins –taking total import to 2 mts, by November 2016.

Private imports softened pressure on FCI/State agencies to offload their grain in the market.  FCI/State agencies continued predominantly to cater demand of PDS. Stocks in Central pool have depleted to 16.5 mts as of 1st December 2016. It will touch around 14mts on 1st Jan 2017 --almost equal to the buffer norm on this date—versus approx. 24 mts on 1st Jan 2016—a decline of 10 mts. (see chart) With 2.5mts consumption per month, Central pool stocks will be 6.5mts—one mts below 7.5 mts stipulated buffer reserves as of 1st April2017 which is very critical for a nation of 1.3 billion populations
Intention behind Government move to finally reduce duty to Nil in December 2016 is to prompt more imports by private players because farmers have no grains to sell from Nov16- April 2017 to millers.
Government to incentivize purchases form farmers.
Effect of demonetization will linger in the next two quarters which means that farmers will encounter cash constraint from market players. Also, wheat output in 2017-18, at best will be around 86-87 mts—given the fact that grain has to mature in a mild winter wherein sowing was also delayed. (Some marginal fall in yield below 3mt/ha is not ruled out.)  Should Government agencies fail to acquire less than 33 mts wheat; supply-demand matrix of self-sufficiency will be elusive.  To replenish stocks, Government will like to corner maximum grain for its granaries and farmers too will give preference to official purchase at MSP of Rs1625/qtl.  It is quite possible that authorities may have to limit privates’ procurement to match its target.
More Imports
During Dec16-March17, additional contracting of one mts or so could be anticipated that will take total annual imports to 3 mts by in 2016-17. Government has kept nil duty open ended which implies that it might impose duty at any time but it is unlikely that a review will be made before June 2017 when the quantum of official procurement will be clearer. If Indian prices are competitive, imports will be automatically regulated. In case prices abroad escalate, imports too will halt.
It is a sad commentary that for the last 3-4years we have been producing less wheat and consuming more, resulting into disappearance of excess stocks. The possibility of shifting sowing acreage to other crops like Chana, Mustard etc. is not ruled out. Ministry of Agriculture need to boost the domestic output to match demand in coming years to contain rising volume of imports. 

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