In today’s Finshots, we see whether India can capitalise on the fallout of the Ukrainian invasion and meet the global need for wheat.
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Alright, on with the story now.
The world is running out of Wheat. That beautiful commodity that goes into pasta, biscuits and bread. It’s a tragedy.
But how did it come to this? How did we run out of staple food?
Well, blame Russia’s invasion of Ukraine. Both Russia and Ukraine export enough wheat to feed 30% of the world. However, with the war in full swing, there are massive disruptions in supply.
Take Egypt for instance. It imports nearly 80% of its wheat from the two countries and is now scrambling for supplies elsewhere. Or the United Nation’s World Food Program which buys 50% of wheat from Ukraine to feed 125 million people all over the world, but now finds itself in dire straits.
The world needs a saviour!!!
Enter India, the world’s second-largest producer of wheat! We’ve had bumper harvests for 5 consecutive years and the government godowns are filled to the brim.
So how does the Indian government plan to step up?
Well for starters, they are being proactive. India is trying to reach out to countries like Egypt, Turkey, Sudan, Nigeria, Lebanon and Iran, offering to meet any potential shortfalls. They are also trying to make sure the wheat can actually reach the intended destination in a timely manner.
Elsewhere, the government is mandating lab tests to check for quality issues. And they are doing everything in their power to prevent a diplomatic row — something that could happen if the wheat were found to be of poor quality. Also, they are asking the railways to put together extra wagons to transport all the excess wheat from farms to ports. And they’re asking Indian ports to allocate special terminals in a bid to expedite access.
They are doing a lot.
But here’s a question for you.
Why did we have to wait all this while to start pushing wheat? Why did we only contribute a measly 1% to the global exports? Well, to understand this we probably need to go back in time and recognise a critical aspect of our agricultural program — the Minimum Support Price (MSP). Now back in the 1960s, the government wanted to promote the cultivation of a special variety of wheat and it thus laid the foundation for what would become the Green Revolution. The plan was to incentivize cultivation by promising to buy the produce at a guaranteed price. A minimum support price if you will. And so, despite the actual demand for wheat, farmers were compensated for their efforts and production soared.
However, when you try and set a price for any commodity inside the chambers of Krishi Bhavan, you are effectively distorting the demand-supply equation. It’s like this — You can never know the true price of a commodity unless a large group of buyers and sellers haggle and bargain on the matter. If the government subverts this process and fixes a price nonetheless, it’s going to be sub-optimal. And in this case, domestic prices remained elevated even as our stock buffers continued to build up. We were producing more wheat than we could possibly consume. Ideally, this should have provided the perfect setting to kick start our export program. However, since the Indian government set a minimum price, farmers typically made more money by selling it to the government than exporting it elsewhere.
And this set off a chain reaction. With little incentive to export wheat, the state had little reason to invest in transport, quality assessment and infrastructure. It was never going to work.
But things are different today. With international wheat prices soaring, farmers are able to sell their wheat for ₹2,700 a quintal. This is way higher than the current government MSP of ₹2,015. So now they’re finally willing to sell their produce elsewhere and the government is trying to facilitate this process.
But alas, there’s one other quirk with MSP. Remember we mentioned the excess wheat stock lying idle in government go-downs?
You’d think that the government could at least export this surplus. But it turns out, that may not be the case. According to rules laid down by World Trade Organization (WTO), countries are expected to play fair while engaging in international trade. That is they can’t ship a commodity if the government is incentivizing the production of said commodity using financial incentives. The argument here is that this often depresses prices and puts international producers at a disadvantage.
In fact, a while ago, Brazil, Australia and Guatemala all registered formal complaints against India by contending that the government was providing excessive financial support to sugar producers in the industry — beyond what is deemed acceptable according to rules laid out in the General Agreement on Tariffs and Trade (GATT). And the WTO agreed with this assessment.
To put it simply, the government will have trouble exporting wheat, since they’ve extended financial support using the Minimum Support Guarantee.
So yeah, it’s unlikely we will start plugging the supply shortfalls in a massive way. But hey… At least we are making progress no?
Until next time…
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