Why wheat export ban may not really help tame soaring food inflation

NEW DELHI – The Indian government’s decision over the weekend to ban exports of wheat is a step aimed at ensuring domestic food security amid soaring inflation, but analysts believe that the step may not have a major impact when it comes to cooling off hardening food prices.

India, the world's second-largest wheat producer, said that factors including lower production and higher global prices have emerged as reasons for worry about the food security of its own 1.4 billion people.

Export deals agreed before the directive issued Friday could still be honoured, but future shipments need approval, the government said. Exports could also take place if New Delhi approved requests from other governments to meet their food security needs.

NOT MUCH SUCCOUR ON INFLATION
“This export ban is a pre-emptive step and may prevent local wheat prices from rising substantially, however, with domestic wheat production likely to be limited by the heatwave, local wheat prices may not moderate materially,” Nomura wrote.

Prices of global commodities have surged following Russia’s invasion of Ukraine in late February. India faces significant upside pressure on inflation, given that the country imports huge amounts of crude oil and is also import-dependent on commodities such as fertilisers.

The foreign firm warned that if the wheat ban led to higher prices of substitutes like rice there could be upward pressure on other food prices.

India’s overall food inflation surged to 8.38 per cent in April as against 7.68 per cent the previous month and 1.96 per cent a year ago. Headline retail inflation in the previous month shot up to an eight-year high of 7.79 per cent.

According to Nomura, higher feedstock costs were adding to protein food inflation pressures and higher diesel and fertilizer costs would likely lead to higher minimum support prices in India and amplify food inflation risks.

“On the whole, we do not expect any material softening of food inflation in India and continue to see the risks as skewed to the upside. From a medium-term perspective, such bans are also a negative price signal for food producers and could disincentivise them from increasing output,” the firm said.

The move is also not expected to majorly improve India’s current account balance – which faces significant upside pressure from high crude oil prices - because annual wheat exports at around $2 billion comprise only a small share of overall exports (0.5% of total goods exports), Nomura said.

STRESS ON MACROS BUILDS
According to Dhananjay Sinha, Managing Director & Chief – Strategist, JM Financial Institutional Securities, the wheat export ban, when viewed in conjunction with other factors, tells a larger story about policy conditions in India.

“The sudden reversal of actions like banning wheat exports after claiming to feed the world, hiking policy rates by RBI soon after sounding dovish, and getting uncomfortable about the depletion of FX reserve after reassuring that it was a major buffer against the US Fed's monetary tightening, reflects constraining policy backdrop for India,” Sinha said.

The veteran strategist says that the government’s recent steps could be emanating from the issue that rising interest rates and government bond yields could upset fiscal calculations.

Government bond yields, which represent the sovereign’s borrowing costs, have shot up so far in 2022, with that on the 10-year paper rising close to 100 basis points.

“The union government has targetted only a 4.6% growth in its budget spending for FY23 and has not provided for higher cost inflation, specially with respect to global crude prices,” Sinha said.

“The question is whether a higher interest burden on large government debt and fears of even larger market borrowings than the budgeted Rs 11.5tn will restrain fiscal spending?”

The strategist said that a combination of monetary tightening and fiscal drag along with weak global demand could lead to a scaling down of the RBI’s FY23 GDP growth much below 7 per cent.

The structural growth for India, which excludes the turmoil witnessed on account of the pandemic, is closer to 4 per cent, within the 4-5 per cent range, Sinha said.