The Ripple Effect: Inconsistent Policies Can Create Market Chaos in India's Grains and Pulses Sector!!

India's grains and pulses sector is the backbone of the country's food security, economic stability, and rural livelihoods. However, inconsistent policies have created ripples across this critical sector, leading to market instability, speculation, and malpractice. As the world's largest exporter of rice, the second-largest producer of wheat, and the largest producer/consumer/importer of pulses, India's policy decisions significantly impact not just domestic prices and supplies but also global markets. Unfortunately, the lack of a coherent and stable policy framework has allowed cartels to manipulate prices, speculative trading to thrive, and subsidized goods meant for government schemes to be diverted to open markets.

The Dual Dilemma of Wheat and Rice Stocks

India's current food grain reserve situation exemplifies the challenges posed by policy inconsistency. As of August 1, 2024, wheat stocks in government warehouses stood at 26.81 million tons (MMT), one of the lowest levels for this date in recent history. In contrast, rice stocks, including the grain equivalent from un-milled paddy, were at a record high of 45.48 MMT. This stark contrast between wheat and rice reserves highlights the complexities of managing food security in India.

The high rice stocks result from favorable production and procurement policies, coupled with timely monsoons. However, the government's decision to ban white rice exports, excluding parboiled rice, since July 2023 has complicated the situation. With storage facilities reaching capacity, there is a growing consensus that the government should consider lifting the ban on rice exports to prevent wastage and capitalize on high global prices. However, such decisions need to be balanced with domestic food security concerns and the interests of farmers.

On the other hand, the wheat market is under significant pressure due to procurement challenges. Despite ambitious targets, wheat procurement has consistently fallen short, leading to a 6.5% increase in retail prices compared to the previous year. The government's reluctance to do away with the 44% import duty, imposed six years ago, has exacerbated the situation, creating a supply shortfall. As of today, consistent supply to wheat processors has been a challenge, this has led them to a situation where delivering adequate finished products like wheat flour and biscuits during the festive season is a difficult task.

India might scrape through with low supply by substituting rice with wheat but this poses a situation where the wheat price is consistently above MSP by 20% and with limited availability of stock for the Open Market Sale Scheme (OMSS) and festive demands picking up this can be a gamble as high prices can get triggered. A reassessment of import policies and reduced import duties could help stabilize the wheat market. However, such policy shifts must be carefully planned and communicated to avoid creating further uncertainty and giving a negative signal to the farmers.

The Pulse of the Problem: Speculation and Price Manipulation in Pulses

The pulses market in India has been particularly volatile, with prices fluctuating wildly due to speculation, cartels, and inconsistent policies. In early 2024, it was clear that India would face an acute shortage of pigeon peas and chickpeas, along with a moderate shortage of black matpe. However, instead of adopting a consistent and transparent approach to managing these shortages, the government introduced a series of knee-jerk policy measures, including stock limits and extensions of duty-free imports for yellow peas.

While these measures had a short-term positive impact on the market, they created long-term instability. Pulses inflation has remained in double digits throughout the year, with prices for key commodities like pigeon peas and chickpeas soaring to record levels. By June 2024, pigeon pea prices had reached INR 130,000 per ton, driven by speculative trading rather than actual demand. Similarly, chickpea prices surged from INR 60,000 per ton in June to INR 80,000 per ton by August, despite the availability of alternative sources like Australian chickpeas.

The rise in prices was not driven by genuine supply shortages but by market manipulation. Speculators took advantage of the uncertainty created by inconsistent government policies, driving up prices and then shorting the market when prices reached unsustainable levels. This kind of market manipulation is detrimental to both consumers and farmers, who are caught in a cycle of volatility.

The Festive Season Conundrum: Demand and Supply Dynamics

As India enters the festive season, demand for grains and pulses is expected to rise sharply. However, with the limited availability of wheat, pigeon peas, and chickpeas, prices are likely to surge even further. While imports of pulses from East Africa, particularly Tanzania and Mozambique, could provide some relief, these shipments are expected to be delayed due to logistical challenges and changes in procurement methods in Tanzania.

The situation is further complicated by rising freight costs and potential congestion at East African ports. These delays will likely push up prices in the short term, adding to the burden on consumers. Furthermore, chickpea imports from Australia are expected to arrive only after the festive season demand has peaked, offering little respite.

Cartels and Malpractices: The Dark Side of Policy Inconsistency

The inconsistency in government policies has created fertile ground for cartels and market manipulators to thrive. In a market where policy shifts are frequent and unpredictable, it becomes easier for vested interests to exploit the system. For instance, the artificial inflation of pigeon pea prices in June 2024 was not driven by actual demand but by speculative trading and cartel behavior.

Moreover, inconsistent policies have led to the diversion of subsidized materials meant for government schemes to open markets. This malpractice not only undermines the government's efforts to support vulnerable populations but also distorts market prices, further exacerbating the problem.

The Need for a Coherent and Transparent Policy Framework

To address these issues, it is crucial that the government adopts a more consistent and transparent policy framework for the grains and pulses sector. Policies should be designed with a long-term perspective, taking into account both domestic and global market dynamics. For instance, the government could establish clear criteria for when it will intervene in the market, such as setting price thresholds for imports, exports, and stock limits. This would provide much-needed clarity to traders and reduce the scope for speculation.

Additionally, the government must ensure that its interventions in the open market, such as the Open Market Sales Scheme (OMSS) and retail distribution schemes like Bharat Dal, Bharat Atta, and Bharat Rice are managed effectively to prevent leakages and malpractices. These schemes should be regularly audited to ensure that they are reaching the intended beneficiaries and not being diverted to open markets.

Moreover, there is a need to diversify the sources of pulses and grains imports to reduce dependency on a few countries. By expanding trade relationships with other pulse-producing countries, India can ensure a more stable supply and reduce the impact of global price fluctuations.

International Trade and Policy Coordination

India's position as a major player in the global grains and pulses market means that its policies have a significant impact on global trade. Therefore, it is essential that the government coordinates its policies with international trade agreements and global market trends. For instance, while opening up rice exports may seem like a logical step given the high stock levels, it must be done in a way that does not disrupt global markets or harm India's trade relationships.

Similarly, any changes to import duties on wheat or pulses should be communicated clearly to international trade partners to avoid creating uncertainty in the global market. By aligning its domestic policies with global trade dynamics, India can ensure that it remains a reliable player in the international market.

India should also look at deeper engagement with countries in the global south to help them become a long-term partner to ensure the food security of India. The transactional nature of policy-making creates uncertainties in them as well and leads to adversarial engagement rather than a win-win approach.

Conclusion: A Call for Coherence and Stability

Inconsistent government policies have created significant challenges for India's grains and pulses sector, leading to market instability, speculation, and malpractice. To address these issues, the government adopts a more coherent and transparent policy framework. By setting clear criteria for market interventions, strengthening supply chain infrastructure, leveraging technology, and coordinating with international trade partners, the government can create a more stable and efficient market.

Ultimately, the goal should be to ensure food security for all Indians while supporting the livelihoods of farmers and maintaining India's position as a major player in the global grains and pulses market. Consistency and transparency in policy are key to achieving this goal. Only then can India hope to break the cycle of market manipulation and create a more equitable and sustainable agricultural sector.

Short Term Scenario

Some recommendations to alleviate the current challenges the government can look at below mentioned interventions:

1. Reduce the import duty of wheat to 10% with imports only allowed to southern ports for three months.
2. Allow export of rice of all varieties with a fixed Minimum Export Price (MEP) and duty per ton, for basmati and aromatic rice MEP can be USD 700 with a duty of USD 150 while for other varieties MEP can be USD 500 with a duty of USD 100.
3. Reduce the import duty of kabuli chickpeas of Russian origin to 0% for three months.
4. Remove concessions provided on Yellow Peas by putting back 50% import duty.
5. Build buffer of Pigeon Peas as prices are low currently as compared to May-June when government tried to procure. The government can look at making a buffer of 0.15 MMT from imported Pigeon Peas (0.2 MMT Mozambique Origin, 0.05 MMT Tanzania, 0.05 MMT Myanmar would be available).
6. Build a buffer of 0.5 MMT of Yellow Peas as prices are extremely low currently and 1 MMT of imported peas are available. The government can provide Bharat Peas Flour to reduce the demand for Besan, hence the cool of desi chickpeas price.

Long Term Scenario

The recommendation for the long term would be to open up import and exports of all grains and pulses with supply controlled through MIP/MEP and Import/Export Duties which should be declared for all key commodities twice a year (before sowing start of Kharif and Rabi). Further, the government should do away with regressive stock control policies.

About the Author

Deepak Pareek is a visionary in the agriculture trade and policy domain, renowned for his unparalleled expertise as a serial entrepreneur, investor, and ecosystem builder. With a rich tapestry of 25 years of diverse experience spanning 34 countries. His accolades speak volumes about his impact and dedication. Honored as one of the Top 10 Agropreneurs of 2019 by Future Agro Challenge, Greece, and recognized as a Technology Pioneer in 2018 by the World Economic Forum, Switzerland, Deepak’s contributions are globally acknowledged. His advisory roles with various private, public, and multilateral organizations have driven significant advancements in agriculture and technology.