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Friday, November 27, 2020

Explained: How free grain is helping mills and lifting exports

To what extent is the cheap/free wheat and rice, especially under PMGKAY, actually being diverted to the open market, instead of going to the intended beneficiaries?

Written by Harish Damodaran | New Delhi | Updated: October 29, 2020 8:46:12 am
Labours spread rice to dry on the ground at a rice mill factory on the outskirts of Agartala. (Express photo by Abhisek Saha)

India produced an estimated 107.59 million tonnes (mt) of wheat this year. Out of that crop, marketed in April-June at the height of the lockdown, 38.99 mt or over 36% was bought by the Food Corporation of India (FCI) and state government agencies.

Both numbers – output as well as procurement – were records. And they matter, particularly when much of the government’s relief to those worst hit by the Covid-related economic dislocations has been in the form of free grain rather than cash.

In 2019-20 (April-March), foodgrain offtake from public warehouses, for distribution through fair price shops and under various welfare schemes, totalled 62.19 mt. That allocation is up more than half, at 94.63 mt, in the current fiscal. This includes not just 60.17 mt under the National Food Security Act (NFSA), which entitles 80 crore-plus persons to 5 kg of wheat or rice each per month at Rs 2 and Rs 3/kg, respectively. There is an additional 32.91 mt Covid-special allocation, mainly under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), that gives an extra 5 kg per month for April-November free of cost.

A question to ask is: What are these allocations, well-intentioned no doubt, doing to the grain markets? To what extent is the cheap/free wheat and rice, especially under PMGKAY, actually being diverted to the open market, instead of going to the intended beneficiaries?

Flour millers in south India are now paying Rs 1,900-2,000 per quintal (100 kg) for wheat delivered at their gate. Till last month, they were getting it at even Rs 1,850-1,900 – lower than the official minimum support price (MSP) of Rs 1,925/quintal payable to farmers. This is for a crop largely grown north of the Vindhyas and has to be carted some distance for reaching mills in Mysore, Dindigul or Kozhikode.

A supervisor checks damages suffered at Rani rice mill in Okkal, Kerala. (Express Photo by Nirmal Harindran)

The possible reasons

If bagged wheat is being delivered in southern mills today at Rs 1,900-2,000/quintal – as against Rs 2,400-2,500 a year ago – there could be three reasons.

The first is that nearly 85% of the government’s 38.99 mt wheat procurement this time was from just Punjab, Haryana and Madhya Pradesh. That would have allowed grain from other states – more so, Uttar Pradesh and Bihar – to be available at way below MSP. But shouldn’t this have been the case last year, too? Why were prices ruling 25% higher then?

A second reason may be demand. Roughly 80% of India’s wheat goes to stone chakki mills that grind the kernels into whole flour or atta. The balance is processed by roller flour mills. They remove the bran (brown outer layer) and grind only the endosperm (white part), first into coarser sooji and further to maida. Refined maida flour is used in eateries and sweetshops – for making naan, parotta and rumali roti or even samosa, kachori and gulab jamun – that were shut during the lockdown. But maida is also an ingredient in bread, biscuits, cookies and noodles, whose consumption at homes has, if anything, gone up. Wheat demand overall is unlikely to have plummeted.

It brings the more plausible third explanation: Leakage. That is bound to happen with 94.63 mt of grain (36.82 mt wheat and 57.80 mt rice) being offered virtually free. The diverted quantities would inevitably depress rates in the open market as well.

Wheat from central India is at present getting delivered to southern mills at sub-Rs 20/kg by trucks, rail rakes and even sea route. About 12,000-15,000 containers (each of 25-27 tonnes), loaded in barges/vessels from Mundra and Kandla in Gujarat, are said to be arriving every month at ports such as Tuticorin, Kochi and Mangalore. A lot of it may well originally have been PMGKAY/NFSA grain. The all-India average retail price of wheat itself, according to the department of consumer affairs’ data, has fallen from Rs 30 to Rs 20 per kg in the last one year! 📣 Click to follow Express Explained on Telegram

The government, however, seems not too concerned. FCI has fixed the minimum price of its wheat for open market sales to bulk consumers at Rs 2,135/quintal. This reserve price excludes rail freight and road transport cost, which is, moreover, taken from Ludhiana or Bhopal to the FCI depots of the destination states.

“FCI wheat will cost Rs 2,400-2,500 at my mill. They cannot be buying at Rs 19.25/kg from farmers, selling at Rs 0-2, and then cover losses by charging us way above open market prices,” points out S. Pramod Kumar, executive director of Sunil Agro Foods Ltd, a Bangalore-based flour miller.

Rice exports

The market distortions are worse in rice, where government agencies procured 51.65 mt or 43.6 % of the country’s 118.43 mt production in 2019-20. The real interesting thing, though, is export of rice, which is projected at 14 mt this year, surpassing the previous all-time-high of 12.7 mt achieved in 2017-18 (see table).

Indian exporters are currently shipping out basmati rice at $ 700-800 per tonne. But the growth is coming from non-basmati, where a combination of Covid-induced panic buying and drought in Thailand has led to surge in global demand. Parboiled rice with 5% broken grains from India is going at $ 370 per tonne, below the $ 450 from Thailand. Even white rice with 25% brokens from India is quoting at $ 330-335, compared to the $ 370-380 per tonne prices of Vietnam, Myanmar and Thailand.

Again, it shouldn’t surprise if some of this competitive advantage is courtesy diverted FCI grain. If last year’s paddy was procured at the MSP of Rs 1,815/quintal, the equivalent price of milled rice would be over Rs 27 per kg – that too, without accounting for commission fees, local levies, transport, bagging, warehousing and other port-handling charges. This rice cannot be exported at less than $ 400-410 per tonne.

Clearly, between FCI’s own “economic cost” of Rs 37.5/kg for rice and the Rs 0-3/kg rates under PMGKAY/NFSA, there are gaping holes for enough grain to leak through.

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