The Cabinet on Wednesday took two decisions designed to tear a large hole in the public ex chequer. First, it increased the minimum support price (MSP) of wheat by Rs 65 a quintal, which will increase the food subsidy bill but bring cheer to a section of farmers. At the same time, it approved the export of an additional 2.5 million tonnes of wheat, a move that will cost the taxpayer several billion rupees but benefit no one.

If the government purchases the same amount of wheat from farmers as it did last year – around 38 million tonnes – it will have to shell out around Rs 2,500 crore more for procurement alone. Add to this the costs of transportation and storage.

The economic cost of wheat, according to the Food Corporation of India, was Rs 1,910 per quintal last year. Add to this the MSP increase and the economic cost is at least 1975 per quintal. The prevailing global price of wheat is USD 337 per tonne, which roughly translates into Rs 1,849 per quintal. The Ministry of Food envisages sale of wheat at “the cost determined by individual tenders subject to the floor price of USD 300 per tonne”. At 2.5 million tonnes and USD 337, the loss would run into over Rs 300 crore.

And this, without taking into account the losses incurred on account of the myriad subsidies that go into producing the precious grain – fertilizer, seed, power, diesel. Not to mention the support services of the agricultural extension and the research and development efforts by ICAR and other bodies.

Most of all, it does not take into account the virtual water export – the cost of water embedded in the grain. After all, it takes 2000 litres of water to produce a single kilo of wheat!

The government is to reimburse FCI on account of these exports - “calculated as the difference between the economic cost to FCI and its realisation from the exporting CPSUs after deduction of actual port expenses and their commission at the rate of 2.5 percent, for which additional funds over and above budget estimate shall be provided.”

This follows from a meeting called by the Prime Minister earlier this year, in which it was decided to try and export 4 million tonnes of wheat to Iran and other West Asian countries. The last tranche of exports of 2 million tonnes were subject to a floor price of USD 228 per tonne – which means even bigger losses for FCI.

The purpose of the export is simply to get rid of “surplus” wheat stocks, as FCI does not have the storage capacity to maintain them. The cost of buffering or storing wheat is rising every year. The government thus finds itself in a “lose lose” situation. If it keeps on storing, it loses money, if it exports, it loses money!