Time to reform wheat

Detach procurement prices from support prices

The Union Cabinet’s decision to raise the minimum support price (MSP) of wheat by five per cent for the current rabi season defies logic in several respects. For one, the effective increase of Rs 65 per quintal conforms neither to the recommendation of the Commission for Agricultural Costs and Prices (CACP), which wanted the MSP to be frozen at last year’s level, nor to the agriculture ministry’s suggestion, which favoured a step-up of Rs 100 a quintal. The announcement’s timing, too, is questionable — the bulk of the wheat crop has already been planted. With the policy of open-ended grain procurement being unchanged, the government is likely to once again end up mopping up the bulk of the market arrivals of wheat in the post-harvest peak marketing season, needlessly swelling its grain reserves, starving the open market of adequate supplies and pushing up wheat prices despite surplus production and record inventories.

The CACP’s counsel against increasing the MSP was meant to mitigate the problem of grain overstocking and discourage cereal-centric crop production at a time when the food demand was diversifying. That logic was contested by the farmers and governments of wheat-producing states, who argued that production costs had soared because of the increase in the prices of diesel and fertilisers and higher labour costs. Decontrol of phosphatic and potassic fertilisers meant they were 30 to 50 per cent more expensive. While these pleas are not unfounded, a higher MSP is bound to bloat the food subsidy bill with worrisome implications for the government’s fiscal deficit and, thus, inflation. The hike of Rs 65 per quintal in MSP will push up the economic cost of wheat (including market levies and handling, storage and transportation costs) by nearly Rs 100 per quintal, thereby increasing the overall food subsidy by some Rs 4,000 crore. Besides, though the government has opened up wheat exports and is also offering wheat for sale in the domestic market to prune its grain inventories, the total outgo on these counts may not suffice to clear space for holding the anticipated fresh procurement of 39 to 40 million tonnes from the current crop. True, the international prices of wheat have tended to rise in the past few months due to weather-driven production downfall in major wheat-exporting countries, making export of Indian wheat viable; but that may not remain the case once global output recovers next season.

The best course for the government, therefore, will be to revisit its food management policy in its totality. Apart from limiting grain procurement to the level necessary to meet the needs of the public distribution system and welfare schemes, a distinction should be made between the support price – meant to prevent distress sales by farmers – and the procurement price, which should be determined by the market, as recommended by several committees and commissions. Private trade, which has by and large been eased out of the grain markets, also needs to be brought back by lifting all kinds of curbs and controls.