Maximum support prices

MSP hikes will stoke food inflation

The government’s new kharif pricing policy, suggesting a steep 16 to 53 per cent increase in the minimum support prices (MSPs) of various crops, is unlikely to fully satisfy farmers even as it will stoke food inflation and swell the food subsidy bill. Approval of the new prices by the Cabinet Committee on Economic Affairs (CCEA) came on the day that inflation numbers for May were released; wholesale price-based inflation went up to 7.55 per cent from 7.23 per cent in April, pushed by unrelenting food inflation at 10.74 per cent. Food inflation has been in the double digits for three months now.

The increase in the MSPs ranges from 16 per cent in paddy to 53 per cent in coarse cereals like jowar. Support prices of pulses and oilseeds have been raised by 24 to 37 per cent, and those of different varieties of cotton by 18 to 29 per cent. Surprisingly, while the CCEA agreed to raise the support price of urad dal by 30 per cent, it chose to defer its decision on the smaller increase of 25 per cent in the price of the key kharif pulse, tur (or arhar), and the 29 per cent increase in moong, on concerns that retail prices would increase. 

The Commission for Agricultural Costs and Prices (CACP), whose report formed the basis for the new MSPs, has argued that it has structured its price recommendations so as to encourage the farmers to shift towards non-cereal crops, which are in short supply. However, though such a switch in the cropping pattern is badly needed given the present unmanageable stock accumulation of staple cereals, the intended change may not take place since the MSPs do not really apply to crops other than rice and wheat, for want of any effective arrangement for procurement. If the area under pulses and oilseeds expands this year, which seems probable, it would largely be in response to their high open-market prices. But the hike of Rs 170 a quintal in the MSP of paddy seems certain to incentivise farmers to produce more of it. Should this happen, it will worsen the government’s woes. Apart from causing the government’s grain coffers to overflow further, it would inflate the food subsidy bill that is already projected at over Rs 75,000 crore. Moreover, it would further alienate the private trade from the food market, needlessly consolidating the government’s monopoly over food trade. Furthermore, this price increase, coming at a time when foodgrain prices in the international market are on the downturn, may lower the price competitiveness of Indian rice. That farming has lost its remunerative edge is true. But the better way of restoring profit to India’s farms is to facilitate cost reduction through efficiency-driven higher productivity. More avenues need to be created, in addition, for farmers to hedge their production and price risks. Such approaches would benefit both producers and consumers without unduly fanning inflation.