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Dictators harm their own countrymen and women in innumerable ways. At times they cause global havoc. This time, the international order itself is under threat. The emerging food crisis is only one of the dimensions of Russia’s war on Ukraine. While the short-term implications are disastrous for economies across the globe, the ensuing arms race will squeeze even the budgets of developed nations. The poor will bear the brunt of lower allocations for development and welfare. India may be no exception.
Globally, the food price index has already reached the highest it has ever been in the last 32 years – FAO’s food price index in February 2022 was 140.7, the highest since January 1990 (Figure 1).
The global food inflation rate continues to be in double-digits (Figure 2), building on the double-digit inflation last year.
Figure 1: FAO’s Food Price Index (%) Base 2014-16
Figure 2: FAO’s Food Price Index inflation rates (%)
Domestically too, food inflation has been pinching as it has ranged between 7-10% since last November. The impact of the ongoing war between Russia and Ukraine will manifest in the March 2022 numbers and onwards.
India has been producing surplus wheat and rice. Procurement at minimum support prices has resulted in bulging central pool stocks. The buffer norm for January 1 is 7.61 million tonnes of rice and 13.8 million tonnes of wheat. Against this, the central pool had 22.4 million tonnes of rice and 33 million tonnes of wheat. On March 7, US No 2 Hard Red Winter (HRW) was quoting at $539 per tonne, 90% higher than last year. Indian wheat is highly competitive in the global market and exports are likely to touch 7 million tonnes in 2021-22. Egypt, Lebanon, Libya, Syria and Tunisia have been major buyers of wheat from Ukraine. Russia and Ukraine meet about one-third of global demand. The Russian attack has halted these exports, so these countries are likely to go for Indian wheat instead.
The central pool stocks of wheat will not be exported due to the commitment under the peace clause at Bali (December 2013). So, the export of wheat will be on private account. In the past, the exporters preferred to source wheat from Madhya Pradesh and Uttar Pradesh. Due to the possibility of export of large quantity of wheat, they may source wheat from Punjab and Haryana also but the state governments need to reduce the arhatiyas commission so that the cost of extra freight to port (as compared to wheat from MP) can be compensated to some extent.
This can reduce the procurement of wheat for central pool stocks. The procurement should still reach 27-30 million tonnes as that is the normal offtake of wheat under National Food Security Act. The government will be closely watching the procurement so that the government has enough space to release stock in the open market if there is high inflation in wheat too.
Surprisingly, the rice prices have not shown the same pressure as wheat. On March 7, 2022, 25% broken Indian rice was quoted at $349 per tonne, 13% less than last year. The decline in Thai and Vietnamese rice was even higher.
In the case of corn, India has experienced a shortfall in the last two years. The import duty on corn was reduced and 312,389 tonnes were imported in 2019. Corn prices have also been on the boil as Ukraine is one of the largest exporters of corn after the US and Argentina. On March 7, the US corn prices were 38% higher than last year. It is unlikely that India will allow the export of corn as domestic demand for poultry feed and industries using corn as raw material will recover from the economic impact of the third wave of the COVID-19 pandemic.
When it comes to edible oils, India imported about 55% of its requirement in the last two years. Palm oil was about 43-50% of the total import of edible oils while the share of sunflower oil is only about 15-20%. Ukraine and Russia are the largest producers of sunflower oil. So, it is likely that some demand for sunflower oil will be met by palm oil. But palm oil prices have also risen by 38% in the past year. India will harvest a record mustard crop this year due to higher area of cultivation in Haryana, Madhya Pradesh and Rajasthan. The stock limits imposed by the government may prevent the farmers from realising higher prices due to the global spurt of edible oil prices but we can expect that they will remain above MSP of Rs 5,050 per quintal. In January 2022, the consumer price inflation was 6.01%. Now that the assembly elections in Goa, Manipur, Punjab, Uttar Pradesh and Uttarakhand are over, a robust increase in petroleum prices can be expected in the next few days, though there is a façade that petroleum prices are decontrolled.
Therefore the full impact of the Russian invasion of Ukraine will be reflected over the next few months. If Ukraine is able to put up strong resistance and the war lingers on, the food supplies from Russia and Ukraine will continue to be off the global markets. This is bad news for poor countries, especially those which are heavily import-dependent.
The bad news does not end here. The disruption in the supply of fertilisers, especially Muriate of Potash, will raise the global prices to such high levels that the budget allocation for fertilizer subsidy will have to be substantially increased. If the war lingers on, poor availability of fertilisers in Kharif will also have an adverse impact on the productivity of rice, soybean, cotton and other crops.
Even if Russia succeeds in making Ukraine a vassal state, it would have caused irreparable damage to the economies of poor countries and made millions of people food insecure. Coming amidst the COVID-19 pandemic, this is disastrous for most economies.
Siraj Hussain and Shweta Saini are visiting senior fellows at the Indian Council for International Economic Relations (ICRIER). Hussain has served as secretary, Ministry of Agriculture, government of India.