Mixed signals from MSP

High market prices question support price relevance

The new rabi grain pricing policy seems to have been influenced more by macro-concerns about food inflation management rather than any considerations relating to food production planning. The marginal increase in minimum support prices (MSPs) of most rabi crops, barring pulses, is understandable given the government’s focus on inflation reduction and the fact that this marginal increase comes on top of earlier hikes of a decent magnitude. Moreover, there are no elections in the northern foodgrain-producing states in the near future for the government to worry about. What exactly is the strategy underlying the price policy? In the case of wheat, the main rabi staple cereal, for instance, the MSP hike of merely Rs 20, or just 1.8 per cent, is insufficient even to offset the inflation-driven increase in production cost. This is being viewed as a cue to the farmers not to expand wheat production as the government has already accumulated massive grain inventories which it is unable to keep safely. But this message is unlikely to be taken seriously by wheat growers as this is the only rabi crop where prices and offtake are assured, thanks to the government’s open-ended grain procurement policy. Wheat farmers are bound to feel shortchanged, perceiving this as a move to keep domestic prices depressed at a time when international prices are ruling high due to the absence from the wheat bazaar of some major wheat exporters, such as Russia and Ukraine.

It is surprising, however, that the government has chosen to limit the hike in the MSPs of pulses and oilseeds, given domestic supply shortages. Their domestic output needs to be increased and the current dependence on imports reduced. But, for some obscure reasons, the support prices of only pulses have been raised by 20 per cent; the increase in oilseeds being barely 2 per cent. In any case, even the new floor prices of pulses fall substantially short of the ruling market prices. If there is an increase in the area under pulses and pulses production in the ensuing rabi season, it would not be because of the modest increase in MSPs, but the high prevailing market prices.

The more important criticism of the modest increase in MSPs would be that it is not MSPs that have driven food price inflation but, in fact, high market prices which will continue to remain high irrespective of the MSPs announced. The market price of food is rising because of demand, and not because of cost. Furthermore, it is not cereals and their MSPs that are driving food price inflation in recent months as much as the price of superior foods, such as milk, eggs, meat, vegetables and fruits — all driven by rising demand rather than government pricing. Pulses are the only non-cereal, energy-rich foods which have contributed to high inflation. But their prices are determined more by the landed cost of imported pulses than MSP. Thus, in formulating the rabi pricing policy, the government has missed an opportunity to send a clear signal to farmers, encouraging them to raise output, augment domestic supplies and thereby reduce dependence on imports.