Liberalization of Wheat: Production, Prices and Trade

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Liberalization of Wheat: Production, Prices and Trade R am phul and Neelam

The present study seeks to address the issues o f opening-up o f India's wheat imports as well as the relationship between production, government procurement, prices and imports o f wheat. The authors find that the world wheat production has been continued to decline, while India's wheat production has been growing rapidly. The share o f wheat in world total merchandise trade and in agricultural trade has been declining continuously. Further, results indicate that there is a strong and positive relationship between volume o f GOI procurement o f wheat and procurement price. Imports have failed to depress wheat prices substantially. Being a large country India's food security is more a function o f harvest than that o f volume o f food imports. Thus, there is a strong case to devote more resources for increase in government procurement and production o f wheat, in view o f strengthening food security base o f the country.

IN TRO D U C TIO N of the glorious achievements in India's contemporary history has been that during the last 5 decades foodgrains production has grown faster than what had been predicted and its growth pace has been more than that of population. However, the expectation that a population of one billion can easily be fed has not been met, not because of food shortage but largely because of policy failure of the successive governments. In the mid-1960s, imports of foodgrains were at their peak, which was 16 per cent of the domestic requirements. In tune with the share of foodgrains import, total imports climbed to 29 per cent which faced serious balanceof-payments and food security consequences. To avoid such repercussions of import, the agricultural policy since mid-1960s aspired to achieve the twin objectives of increasing foodgrain production and decreasing reliance on import for foodgrains, i.e., achieving self-sufficiency. This was achieved through enhancing the productivity of food crops by bringing about technological, institutional and infrastructural

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FOREIGN TRADE REVIEW

breakthroughs. These policies have enabled the country to meet the domestic cereal demand from its own production, and reduce reliance on imports. In 1978, for the first time in post Independence period, India emerged as a net exporter of both wheat and rice which are the staple diets for Indians and represented 74 per cent of total foodgrain consumption in the country at that time. During the last decade, the country has been gained in its significance as a net exporter of rice. But there is still tremendous uncertainty in the case of wheat. Wheat has made an enormous contribution in ascertaining food security of the country and is a chief source of carbohydrates for an overwhelming numbers of Indians. Thus, the availability and prices of wheat has an important bearing on the health and well-being of people. As the population, per capita income and taste for foodgrains increase, people demand more and more of cereal food and hence the demand for wheat is also expected to rise in future. How should the economy respond to this expected increase? Twenty years ago, the answer of this kind of question would have been quit simple: to increase the domestic production of wheat (or any other product where we are falling short of demand). However, there has been a change in the thinking process. Now such a question can also be answered along with the following lines: "If the cost of wheat production is less than the unit of foreign exchange saved through the import substitution only then we should produce wheat domestically. Otherwise we should import wheat and export something else where we have comparative advantage". Presently, India has opened tariff free imports of wheat for private traders and hastily banned its exports. It necessitates for analyzing some of the generic issues: (i) does India benefit from the import of wheat, and (ii) can import and export of wheat be resorted to stabilize domestic prices? The analysis of these issues will lead to examine the nature of world wheat market and estimate in which direction world and India's production, imports, exports, and consumption of wheat have moved during the last decade. It is, therefore, instructive to know: (a) what is the prospect of wheat demand, (b) can wheat production keep pace with consumption growth, (c) what is the relationship between production, prices, procurement and imports of wheat, and (d) what is the domestic resources cost (DRC) of wheat production in India. For this, there is a need for comprehensive study. The study is organized into five sections. Section II provides the review of existing relevant literature, sets out objectives of the study,


LIBERALIZATION OF WHEAT: PRODUCTION, PRICES AND TRADE

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discusses the analytical techniques used to analyze information, and mentions the sources of data. Section III gives the time profile of world wheat trade and production, and examines India's place in it. Wheat consumption pattern, production cost, comparative advantage, and expectations on demand are given in Section IV. The last Section details main findings and offers their policy implications.

II. REVIEW OF LITERATURE There are few studies which had tried, in recent past, to analyze the domestic foodgrain situation and India's wheat trade. The prominent studies are as follows. Raghavan (2006) analyzed domestic wheat situation and argued that India's history of wheat imports had been guided by political consideration rather than by food security concerns. Gulati (2002) assessed competitiveness of Indian agriculture by using domestic resources cost (DRC) measure on an importable hypothesis. It is found that liberalization of Indian agriculture will lead to an expansion in wheat exports. Chand (2001) attempted to analyze India's wheat trade by using tabular analysis and argued that India had a need for reduction in area under cultivation and minimum support price (MSP) of wheat. Sheriff and Mallick (1999) analyzed the consumption pattern across rural and urban areas by observing the expenditure on food items and quantity of consumption. Their main findings are: (i) the share of cereals in food basket has come down both in rural and urban areas, (ii) these changes have affected the nutritional intake of the population, and (iii) increase in consum ption of cereals will help us to m eet the problem of malnutrition. Naik (2001) examined the trend on prices and production of Indian wheat. It was found that India had a need for high growth in production of wheat to satisfy the domestic demand generated by increase in income and change in food habits. Kumar et al. (2007) compared MSP of wheat with its whole sale price at Delhi's market during 1990-99. It was found that MSP was well below the whole sale market price during entire period under reference. Jha (2001) estimated the extent of food security in India and found that per capita availability of foodgrain had increased, and imports of foodgrain as percentage of availability had declined. Bhalla (2004) evaluated India's food security in the context of trade liberalization by estimating the trend on foodgrain production and demand. It is emphasized that India cannot entirely depend on food imports, and it should produce a major part of its food requirements domestically. Srinivasan and Iha (1999) compared the


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efficacy of bufferstock scheme and variable levies for stabilization of foodgrain prices. They argue: variable levies option is superior to buffer stocks in stabilizing the prices of foodgrains. Ramphul and Vedpal (2006) assessed India's comparative advantage of wheat production in the context of an exportable hypothesis by using DRC measure. They found that India is a competitive producer of wheat in the world market. Ramphul (2006a) estimated the trend on world agricultural exports by using the exponential growth model. It was explored that under the WTO regime, growth rate of world agricultural exports had come down. As a result, the share of agricultural trade in world merchandise trade had deteriorated. Ramphul (2006b) analyzed the composition of India's agricultural trade. It is found that wheat has become India's major export item which constituted 8 per cent of India's total agricultural exports during 2002-04. Jha, Murthy, Hari and Seth (1999) estimated elasticities of wheat by using the double-log demand function. They find that wheat consumption is negatively related with its own price and positively related with income of the consumers. Parikh, Kumar and Darbha (2003) examined the consequences of increase in the MSP of wheat by applying General Equilibrium Model. They find: higher MSP reduces wheat demand and leads to larger wheat stocks. Gandhi, Zhou, and Mullen (2004) estimated determinates of wheat yield by using the Cobb-Douglas type yield function. They conclude that irrigation, good quality seed and fertilizer have significant effect on wheat yield. From these studies it is observed that: (i) none of the study has touched the issue of nature of world wheat market, (ii) the relationship between government procurement, procurement price, production, and imports of wheat in India, which is most important to judge the liberalization of wheat sector, has not received as much attention as it deserve, and (iii) none of these studies has worked out India's comparative advantage in production of wheat under an importable hypothesis during second half of 1990s and in 2000s. The present study is a humble attempt to fill up this gap in the literature.

Objectives The main objective of our study is to assess the economic viability of Government of India (GOI) policy of opening up the tariff free import of wheat for private traders and to design the appropriate strategy for meeting the deficiencies in bufferstock of wheat. The specific objectives of the study are:



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(i) To examine the pattern of world and India's trade and production of wheat. (ii) To estimate the relationship between production, government procurement, imports and prices of wheat in India. (iii) To examine the pattern of wheat consumption in India. (iv)

To work out India's comparative advantage in wheat production.

Methodology For analyzing the information, we have used various mathematical, statistical and econometric techniques. A brief discussion of analytical techniques/methods is in order. Compound Annual Groxvth Rate (CAGR) To estimate the trend, following semi log-linear regression model is used: log Y= log A + log B T Where Y : dependent variable, B : 1+g; g = compound growth rate, T : time.

The values of parameters A and B in the model are estimated by using Ordinary Least Square (OLS) method. The compound annual growth rate (CAGR) is computed by employing following formula: CAGR = [Antilog (log B)-l] 100

...(2)

Income Elasticity o f Demand (IED) The magnitude of income elasticity of wheat demand is obtained by estimating the Engle curve in the log-linear form: log (Consum) = a + b log (Income) Where Consum Income a b

wheat consumption in kg/month total consumption in Rs/ month intercept term income elasticity of demand


...(3)

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The values of parameters a and b in the model are estimated by using Ordinary Least Square (OLS) method. Coefficient o f Variation around Trend (CVT) The instability index is estimated by computing the co-efficient of variation around the trend line as per following equation: CVT= CV (1-R2)1/2

...(4)

Where CVT: Coefficient of variation around trend line CV =

y

x 100 ; CT = standard deviation, X = mean,

R2 : Coefficient of determination of the trend as per following equation: Y = a + bt; Y: dependent variable, t: time, a and b: coefficients of regression.

Domestic Resources Cost (DRC) The DRC is defined as, the value of factors of production needed to earn a unit of foreign exchange through export or save a unit of foreign exchange through import substitution by production of the commodity under investigation. Alternatively, DRC is the ratio of the cost of domestic non-tradable resources (evaluated at shadow prices) to net foreign exchange earnings - value of output minus value of tradable inputs. Accordingly,

DRC; =

Where DRC : Domestic Resources Cost of the ith commodity, A.. : Requirem ent of the j th input to produce one unit of the ith commodity,

p; pw

Shadow price of the jthnon-tradable input World price of the ith commodity adjusted for value of by- product transportation, handling and marketing expenses

pw

World price of the jth tradable input adjusted for transportation, handling and marketing expenses.

If the value of DRC is greater than unity (DRC>1), it means that the domestic resources can be put to better use in an alternative way, and if



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less than unity (DRC