March 9, 2017 11:00 am JST

New Delhi struggles with wheat tariffs dilemma as prices fall

Farmers and millers at odds over policy amid stock hoarding and protests

SAURABH SHARMA and GANGADHAR S. PATIL, Contributing writers

A farmer harvests wheat near Lucknow. (Photo by 101Reporters.com)

BANGALORE, India -- The Indian government is struggling to frame a coherent wheat-price policy in the face of conflicting demands and mounting criticism of its decision to suspend import tariffs in December.

Imports have surged since wheat duties were cut to 10% from 25% in September, after a surge in prices caused by supply shortages, and then eliminated three months later. Imports for the fiscal year ending March 31 stand at more than 5 million tons, the highest in a decade, mostly from Ukraine and Australia.

The policy has led to price cuts in the domestic market, prompting traders and growers to hold supplies in the hope of a rebound, while farmers fear the permanent loss of markets to foreign competitors. The government promised after the first cut in duties that tariffs would be restored in March, but has yet to announce a date.

As a result of the confusion millers are deferring import contracts because of uncertainty over the tariff regime and farmers are planning to hold harvested grain in stock, hoping for a correction in prices. Farmers are demanding the reimposition of duties, while millers have asked the government to retain zero tariffs even after the next domestic crop is harvested.

"Traders and farmers are stocking wheat in anticipation of a price revival," said V.M. Singh, president of the Rashtriya Kisan Mazdoor Party, a farmers' organization. "Imports have led to a fall in domestic prices by more than 10%, and they might go down further."

According to V.K. Bansal, president of the Roller Flour Millers' Federation of India, wheat prices peaked at 23,000 rupees ($344) a ton in New Delhi in December, nearly 20% above the rate in December 2015. Bansal said this made wheat unaffordable to millers, who buy 15% of all wheat produced domestically. Following the two duty cuts, wheat prices are now hovering around 18,000 rupees a ton in New Delhi.

Low rainfall

The government has projected the domestic wheat harvest at 93.5 million tons in the current fiscal year, which would reduce the need for imports to meet demand, but trade analysts have estimated the crop at no more than 82 million tons, compared with 86.53 million tons in the previous fiscal year. The crop is planted from September to March, and harvested between April and February.

A government report released in mid-January said that international wheat prices are expected to continue to decline because of a projected increase in global wheat production. Domestic production has also been constrained in the last two years by low rainfall. However, the report also forecast a further recovery in domestic production to 96.64 million tons in the year to March 2017, in part because of an increase in winter-crop planting.

Traders dismiss farmers' fears of losing market share to cheap imports, saying they are protected by the government's minimum support price of 16,250 rupees a ton -- the price at which it plans to procure 33 million tons of wheat between April and June. The minimum support price is a price floor guaranteed by the government for grain purchases to supply its subsidized public-distribution system.

According to the government, domestic wheat prices have on average exceeded international prices by around 5,000 rupees a ton since April 2014. In December, however, domestic wholesale prices (which are generally lower than retail prices) were just under 19,000 rupees while international prices hovered around 11,000 rupees.

Tejinder Narang, a New Delhi-based trade analyst, said it was clear that the price rise between August and December was caused by a slump in domestic production. Narang said a shortfall of 7 million tons in wheat procurement in the current fiscal year by the Food Corporation of India, a government agency that handles public distribution of wheat, showed that the government had over-estimated output.

The FCI's wheat stocks plunged to their lowest level in five years, allowing it to release just 3.6 million tons to millers and wholesale buyers under the open market sale scheme, a price-stabilization program, compared with a target of 6.6 million tons.

Millers say free imports are needed to keep the price of wheat flour under control. "We have asked the government to keep imports free and also initiate sale of wheat under OMSS," said Bansal.

However, wheat farmers in Uttar Pradesh, Punjab and Haryana, the three largest wheat-producing states, are threatening large-scale protests unless import tariffs are reintroduced.

"Indian farmers produce the best quality wheat in the world, and in abundant quantities," said Rakesh Tikait, president of the Bharatiya Kisan Union, an organization formed to oppose government policy on wheat. "What then is the need to import wheat from other countries and scrap the import duty?"

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