Why India Is Trying to Curb Wheat Price Hikes?

tendata blogMarket Insights

ten data blog16-08-2023

Indian officials are considering a range of measures to boost domestic wheat supplies and reduce local prices that soared to a six-month high last week.

Last year, India banned wheat exports due to a sudden and sharp rise in temperatures that led to a drop in yields, even as demand for exports picked up to meet a global wheat shortage triggered by the Russia-Ukraine conflict.

The wheat export ban failed to stop prices from rising, prompting trade and industry officials to say that even this year's harvest was below the government's estimate of a record 112.74 million tons.

Following last year's wheat export ban, India ordered a halt to its largest rice export category in July, raising fears of further inflation in global food markets and reflecting New Delhi's urgency to curb food prices in the world's most populous nation.

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Why is the government worried about rising wheat prices?

The ruling Bharatiya Janata Party (BJP) led by Prime Minister Narendra Modi will face general elections early next year. Some key state assembly elections will be held before the 2024 parliamentary elections. The BJP is keen on retaining power in some state assemblies and seizing control of some large hinterland states.

Even a slight rise in food inflation - which accounts for nearly half of the overall consumer price basket - tends to anger voters and provide opposition parties with ammunition to attack the government.

In 2014, when Modi first took office as prime minister, sustained high inflation helped the Bharatiya Janata Party (BJP) defeat the Congress Party-led coalition.

Inflation in India, Asia's third-largest economy, has begun to accelerate after showing signs of slowing down earlier this year. in July, food prices jumped 7.75 percent year-on-year, compared with a 1.24 percent decline in June.

In addition to rice and wheat, the government is trying to rein in prices of vegetables and pulses.

Are India's wheat stocks adequate?

Apart from supplying wheat to the poor at highly subsidized prices, the government started providing free wheat to millions of beneficiaries in April 2020 to avert food shortages during the coronavirus blockade.

The free distribution of foodgrains has led to a reduction in government grain stocks, and lower wheat production in 2022 and 2023 means that stocks in state warehouses are being replenished at a slower rate than expected.

Wheat stocks in government warehouses stood at 28.3 million tons on Aug. 1, up from 26.6 million tons last year but below the 10-year average of 35.3 million tons.

The government has made 5 million tons of wheat available to bulk consumers such as flour mills and cookie makers to calm prices. Increased stocks in state warehouses will help the government to provide more quantities to stabilize prices.

What policy measures can the government consider to cool down?

According to various trade estimates, India needs to import 3 to 4 million tons of wheat to bridge the gap.

The government may remove or reduce the 40% import duty on wheat to help flour mills import the grain. But India's imports could push up global prices, making overseas purchases expensive or unfeasible for private traders.

New Delhi could also import wheat from top producers such as Russia through intergovernmental agreements.

Under an intergovernmental agreement, India could import between 80 and 9 million tons of wheat - far more than it needs - to shore up wheat stocks and provide more free food to the poor.

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