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Waging war for sustenance

Disruption in supplies due to Ukraine crisis may create food shortage, price distortions

Waging war for sustenance

Grain of truth: High input costs may deny farmers benefit of high prices. Reuters

Aunindyo Chakravarty

Senior economic analyst

The war in Ukraine has become a war on the world’s poor. Russia and Ukraine, together, accounted for a quarter of the world’s wheat exports, one-sixth of global corn exports, nearly a third of barley and three-fourths of the export of sunflower oil. American sanctions on Russia mean it cannot sell its extra wheat in the global market, while Ukraine doesn’t have enough able-bodied farm workers to either harvest or sow crops. On top of this, China, the world’s biggest producer and consumer of wheat, is expecting a terrible crop this season, thanks to widespread flooding in wheat-producing areas. That means the world’s most populous country will be looking to buy more wheat from the global market, at a time when war has disrupted supplies.

If Indian governments had listened to free market-loving economists and pink-paper pundits, we might have ended up with food riots, runaway inflation and a bankrupt fisc.

Normally, this would have been good news for farmers across the world, since they would stand to gain from high food prices. But Russia’s invasion of Ukraine has increased their input costs dramatically. First, it was the price of fuel, needed not just to power tractors, harvesters and pumps, but also to lug their produce to the market. Then came the disruption of fertiliser exports from Russia and Belarus, which supply one-fifth of the world’s fertilisers. The result has been a sharp rise in fertiliser prices.

None of these disruptions will disappear overnight, even if Russia withdraws from Ukraine and the West lifts its sanctions on Russian exports. By the time things ease, the agricultural season would have ended in most parts of the world. Ukraine will not be able to magically grow wheat and sunflower seeds. Farmers in Brazil, who have cut back on output because of high fertiliser prices, will not suddenly grow more over a weekend. So, the food shortages and price distortions are here to stay for at least most of 2022.

The worst hit will be countries in Africa and the Middle-East, which are heavily dependent on wheat imports. Egypt is a prime example, where two-thirds of the population lives on heavily subsidised aish baladi (‘bread of life’), a round flat-bread. Each person is entitled to five pieces, every day, for one-tenth of what it costs the bakeries to make them. The Egyptian government compensates the bakeries for their losses. The trouble is that Egypt imports more than three-fourths of the wheat it consumes. Its bread-subsidy scheme — a lifeline for its poor — is a massive fiscal drain, and higher global wheat prices are threatening to bankrupt it.

If India’s situation is somewhat better, we have our much-maligned procurement system to thank. The MSP system has made India a grain surplus country, and we export a small quantity of wheat and rice every year. This global food crisis is a great opportunity for big farmers and grain traders to make the most of the rise in international grain prices. However, we have no handle on our input costs — especially fuel and fertilisers like potash. India imports 60 per cent of its potash needs, mostly from Russia and Belarus. The disruption in supplies has made the government turn to other big potash producers such as Canada and Israel, but this will come at higher prices. Fertiliser companies are preparing for a 40-60 per cent rise in prices during the kharif season, which could well extend into the rabi season as well.

Farmers will, justifiably, demand higher MSP from the government. It is possible that the government will not have to procure too much grain, since private buyers might be willing to pay more if they are able to get good prices in the export market. Traders, big and small, are already beginning to store wheat and pulses in anticipation of higher prices. However, if the MSP is not increased, grain traders are likely to beat down the price at which they buy. The government also has a massive ration shop network to run, for which it has to procure some amount of wheat and rice. This too will force a big hike in MSP.

On the other side, the Modi government cannot afford to step back on its vote gathering policies of cheap food to the poor. Subsidised food will become all the more essential this year, because fuel costs will push up the prices of other essentials. This means there is a high likelihood that the Centre’s food and fertiliser subsidy bills will go up this fiscal, compared to what the budget has estimated. The budget has allocated about Rs two lakh crore towards food and sugar subsidies. Another one lakh crore has been set aside for the fertiliser subsidy. The government might end up spending Rs 40,000 crore extra on subsidising fertilisers, and an additional Rs 20,000 crore might have to be spent on the food subsidy. That’s an extra spend of Rs 60,000 crore on subsidies alone.

None of this can be recouped by raising taxes on fuel. If anything, the Centre might have to cut the excise it takes on petrol and diesel at some point. Chief Economic Adviser V Anantha Nageswaran has already said that if crude oil prices continue to stay above $110 per barrel, the government will also have to share some of the burden. All this points to more borrowing and a higher fiscal deficit! What is worrying is that high inflation will force the RBI to hike rates, increasing the government’s interest costs.

India’s situation could have been much worse, had we not followed the ‘socialist’ policies of becoming self-sufficient in food. Our much-maligned MSP system has ensured that we have no danger of food scarcity, even if the global supply of foodgrain contracts. We will still need to pay more for oilseeds and pulses, but at least our poor can fall back on calorie rich staples. If Indian governments had listened to free market-loving economists and pink-paper pundits, we might have ended up with food riots, runaway inflation and a bankrupt fisc.

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