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Thursday, April 15, 2021

An impending problem with wheat inventories of the government

by Ajay Shah.

Wheat stocks with the FCI had risen to 24 million tonnes in 2012-13. This was an imprudent level of inventory, either when compared with the requirement of buffer stock in the country, or when compared with the ability to store wheat in the public system. There was a concerted effort to bring down this inventory, and it was brought all the way down to 8 million MT in 2016-17.

We may now face a bit of a problem on this score. Under certain assumptions, there is a possibility that at the end of 2021-22, wheat stocks could be about 35 million MT.

Govt. opening stock Produc-tion Procure-ment PDS, Schemes outgo Open Market Sales Scheme (OMSS) Closing stock
2017-18 8.1 92.5 31 24 1.4 13.7
2018-19 13.7 92 36 24 8.1 17.5
2019-20 17.5 97.5 34 24 3.0 24.3
2020-21 24.7 98.5 39 34 1.5 27.3
2021-22 (Estimated) 27.3 98 39 24 7.0 35.3

The table above shows data for recent years, and an estimate for 2021-22. At the end of 2016-17, i.e. at the start of 2017-18, wheat stocks were at 8.1 million MT. From this point, inventories have come back up.

Procurement rose to 39 million MT in 2020-21. We assume that it will stay at the same level in 2021-22.

The use of wheat in the public system has been stable at about 23 or 24 million MT. The exception to this is 2020-21 where an additional 10 million MT were given out into the country through "PM Garib Kalyan Yojana", on account of the Covid-19 crisis.

Assuming that 7 million MT is sold through the OMSS, this yields a projection of closing stock, on 31/March/2022, of 35 million MT.

It is worth reiterating the assumptions under which we posit this scenario, for wheat inventory of 35 million MT on 31/March/2022: (a) Public procurement in 2021-22 will be the same as the previous year, i.e. 39 million MT, (b) 24 million MT will be used by PDS and other schemes and (c) Government will sell 7 million MT to the private sector through OMSS.

Holding 35 million MT of inventory presents certain difficulties. It represents an unreasonable scale of holding a buffer stock, when compared with the requirements associated with fluctuations of wheat production. As the data in the column shows, the fluctuations of wheat production are about a few million MT; e.g. a buffer stock of 5 million MT to 8 million MT would suffice. In addition, 35 million MT is likely to exceed the mechanisms available in the public system to safely store wheat. When low quality storage mechanisms are employed, the exchequer loses money owing to depreciation.

This problem was incipient in 2020-21 also, and was averted because an additional 10 million MT was pushed out into schemes, on account of Covid-19.

What can the government do in order to fare better? There are four useful pathways:

  1. If wheat procurement is reduced, then the problem will be diminished. As an example, if the government goes back to the 2019-20 level of buying 34 million MT, this would get the projected closing stock down from 35 million MT to 30 million MT.

  2. Selling more wheat through OMSS would help. At its peak, 8.2 million MT was sold thorugh OMSS in 2018-19.

  3. The macroeconomic distress associated with Covid-19 has not entirely subsided. Hence, there is a case for repeating something like the PMGKY grain subsidy, to help improve access to food for poor people.

  4. Improvements in storage, such as going beyond CWC to private warehouses, will reduce the extent to which stored wheat depreciates.

There is a need for policy makers on food to recognise these impending problems and initiate steps through some linear combination of these four actions. On a similar subject, also see an article by Siraj Hussain and Jugal Mohapatra.

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