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Firming up food security

The government’s decision to build a strategic reserve of five million tonnes of food grains comprising three million tonnes of wheat and two million tonnes of rice is a welcome response to spiralling world prices. The entire procurement and storage expenses for the reserves will be borne by the Centre, and the States will be spared of the fiscal burden. Union Agriculture Minister Sharad Pawar’s announcement that the government would import wheat to ensure food security if domestic production fell short is a measure of the ruling United Progressive Alliance’s concern over food prices. The appointment of an oversight committee to monitor imports is meant to pre-empt criticism over procedural irregularities as well as excess payments. The government’s recent experience in making purchases in volatile international markets, whether of food grains or edible oil, has not been satisfactory. For instance, last year the government was forced to deal with a cartel of wheat exporters who pushed up the prices. This time the government hopes to import in phases and, with a transparent oversight mechanism in place, it can avoid many of the problems it faced in the past. The reserves of food grains will be in addition to the buffer stocks and, while meeting any contingency of food shortage is their main purpose, their build up acquires importance in the context of the anti-inflation measures now under way. Rising food prices, though not the only contributor to the overall inflation, are by far the most sensitive issue politically. The government has already acted to ease supply side pressures by reducing duties and restricting exports.

It is hoped that the reserves will help douse inflationary expectations over the short-term and help in achieving food security over the medium-term. Significantly, the government seeks to achieve the same objectives by hedging wheat purchases in the international markets through a recently concluded call option. That gives it the right but not the obligation to buy 1.8 lakh tonnes of wheat at $406 a tonne. The option is to be exercised by July 15, by which time the domestic scenario on wheat production and procurement will become clear. Such hedging tools have a cost — in this case a premium of $35 a tonne is part of the deal — but the advantages of an assured supply at a firm price at a time when global markets are uncertain outweigh the costs. For the government, the best news on inflation would be from the domestic food front. If the expectation of a bumper wheat crop of around 75 million tonnes materialises and the procurement target of 15 million tonnes is achieved, price pressures will surely ease.

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