10m tonne wheat to be sold in the open market

Tags: News
With risk of food prices rising again due to poor monsoon, the government on Thursday took a pre-emptive step by approving sale of additional 10 million tonne of wheat in the open market.

"The cabinet committee on economic affairs has cleared sale of about 10 million tonne of wheat via the open market sale scheme (OMSS) to bulk buyers," a government official told reporters after the meeting on Thursday, postponed by a day due to late sitting of parliament.

Government fixed the reserve price at Rs 1,500 per quintal for old crop and five per cent more for new crops. The move will also help food corporation of India offload burgeoning grain stocks.

India is among the largest producers of food grains: production has been over 250 million tonne in recent years. Last year it was a record 263 million tonne. Because of high minimum support prices for wheat and rice, the procurement of food grains too has been high and estimates suggest that food stocks could be as high as 65 million tonne, more than three times the buffer stock requirement. Wheat stock alone was 38 million tonne. Offloading of stock would create storage for new arrivals as well.

In India, food and energy account for a hefty 57 per cent of the CPI (retail inflation) basket. An analysis by RBI found that food and fuel cost spikes are key drivers of households' inflation expectations over the subsequent three months to one year.

Up to 40 per cent of the variance in consumer inflation expectations can be explained by these two items. More precisely, statistical modeling by the Reserve Bank of India suggests that a 100 basis point shock to food costs affects one-year forward expectations by as much as 50bps and persists for eight quarters.

This means more tightening measures in the monetary policy. So keeping food prices under control at this juncture is critical, particularly when both consumer price index and wholesale price index inflation came in lower than expected. Consumer price index inflation in June was 7.3 per cent.

Wheat prices were in the range of Rs 1,600 a quintal as it had firmed up in the last few days and the cabinet decision will help in lowering prices and thereby slowing down food inflation, which has the tendency to go up due to monsoon failure.

The country is expected to have 30 per cent deficiency in monsoon this year. Last year too there was 23 per cent deficiency and government decided to release 8.5 million tonne of wheat in the open market, but the offload was only 5.8 million tonne. The wheat price was around Rs 1,500 per quintal last year. The sale had yielded Rs 9,310 crore last year.

A study by the IMF suggests that a sustained 5 per cent rise in food prices could increase core retail inflation by 2 percentage points.

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