Rajan blames high food prices on frequent MSP hikes

Attributing high food inflation to rising rural wages and administered food prices, Reserve Bank Governor Rahguram Rajan today called for slower pace of increase in minimum support prices of foodgrains.
He also said the Agriculture Produce Marketing Committee (APMC) Act, which governs marketing of agriculture produce, needs to be amended.
Talking about possible causes of high food inflation he said: "Food prices should be determined by the market and MSPs (minimum support prices) should be used to provide only a lower level of support so that production decisions do not get distorted or the price wage spiral accentuated. This means limiting the pace of MSP increases going forward."

In the last 10 years, MSPs of wheat and rice have increased more than 100 per cent.
On Agriculture Produce Marketing Committee (APMC) Act, he said: "There is a need to reduce the wedge between what the farmer gets and what is paid by the household by reducing the role, number, and monopoly power of middlemen as well as by improving logistics."
APMC Act provides a platform to farmers to sell their produce to agents or traders.

Increased liquidity flow into rural areas has resulted in growth in agricultural wages. The Centre's rural employment scheme (MGNREGA) has also led to a massive rise in rural wages in the past few years, the Governor said.

To contain food inflation and raise food production, there is a need to contain the rise in wages elsewhere, he said. "Contain any unwarranted rise in rural wages as well as the rise in other agricultural input costs (though not through subsidies) so that the farmer gets a higher return."
Dwelling further on the causes of high food inflation, he said an increase in production costs, primarily rural wage inflation, has also resulted in elevated prices.
Food prices are high also due to growing prosperity and shift in dietary habits of people, he added.