Demand for wheat puts India at risk

Business Materials 25 February 2008 03:35 (UTC +04:00)

( FT )- India is at risk of sustained food price inflation as domestic production of key staples such as wheat and edible oil fails to keep pace with rising demand, according to the country's top official on commodities trading.

B.C. Khatua, the chairman of the Forward Markets Commission, which regulates futures trading for food commodities ranging from wheat and rice to dried beans, said India urgently needed to improve agricultural productivity to stem food price rises, which hit the nation's poor majority the hardest. " India has a deficit of oilseed, a deficit of many pulses and now a deficit of wheat - all the major staples are now getting hit by the demand-supply gap," said Mr Khatua.

Food inflation is one of the most politically sensitive areas of the Indian economy, with the World Bank estimating 29 per cent of India's 1.1bn people live below the national poverty line.

Mr Khatua said India's rapid economic growth was leading Indians to increase consumption of commodities such as edible oil, forcing the country to import 40-45 per cent of its needs of 12m-13m tonnes a year. The deficit in wheat was more modest, with India importing 2 to 3 per cent of its requirements to supplement domestic output of about 75m tonnes.

But a sharp disparity between international and domestic wheat prices, which are kept artificially low through high tariffs and subsidies, meant that imports played havoc with domestic prices.

The international price of wheat on the Chicago Board of Trade has more thandoubled in the past year to a record high of above $10.60 a bushel for March delivery.

India's food grain output fell by an average 0.1 per cent a year over the past five years, according to Morgan Stanley, while food imports rose 54 per cent year-on- year in the year ended September, the latest data available.

"There has been a significant deceleration in supply growth because of problems facing the farm sector," said Chetan Ahya, a Morgan Stanley economist, in a report.

Price fluctuations last year led the government to suspend wheat and rice futures, undermining investor confidence in the National Commodity and Derivatives Exchange, the country's second largest commodities market, which specialises in grain contracts.

Analysts describe the step as regressive because the country's nascent futures markets benefit farmers by providing them with transparent pricing for their goods andby leading to greater ­investment in the rural infrastructure.

Mr Khatua said India needed to address infrastructure problems such as the lack of rural roads and warehouses, cold storage and processing facilities to lift productivity and help reduce wastage, which he estimated at 15-20 per cent of agricultural output.