Business | Politics

India Spending Big Time on Wheat and War Planes: Role of Govt

India has floated two major tenders that have everybody drooling.

The first, is for 530,000 tons of wheat, announced a week ago. Imports by India, along with Japan and Taiwan have pushed wheat prices to record highs on the Chicago Board of Trade (see chart). This import of wheat is ironic, for just a year ago India was expecting a bumper harvest and hoping to stop wheat imports. Poor rainfall, however, has reduced government stocks by 30% - requiring the government to import more, and banning futures contracts on wheat to reduce speculation.

The question to ask, of course, is why the government is involved in this process? Sure, by issuing such huge tenders the government can theoretically gain more bargaining power. But that power is usually used to the benefit of corrupt officials, not to get a lower price for the country. Besides, the presence of the government in domestic procurement and distribution are so egregious as to make any price advantage irrelevant. It is the presence of the government that leads to a botched agricultural supply chain, leading to collosal waste, monopoly of the government over markets that makes them inefficient, and higher prices for produce that encourages farmers to stay farmers and consumers to pay more.

The second big contract is for 126 fighter jets, to upgrade India’s aging Air Force. This is the biggest defense contract to have been announced in the last 15 years, and you can see the Americans and Russians drooling. In the running are Lockheed Martin and Boeing from the USA, MIG from Russia, and fighters from France, Sweden, and Europe. This should be an interesting and close race. In this case, the government’s role is somewhat more beneficial to the country. While a lot of officials in the Air Force and Defence Ministry will get rich over this, a good 30-50% of the final value of the contract will have to be sourced from India, and 108 of the fighters must be built in India - providing a good fillip to the nascent Indian defense industry.

© 2007 The Discomfort Zone.