Hefty MSP hike promises in poll-bound states could spell trouble in future

Hikes in wheat and paddy MSP in key states that contribute a significant amount to central pool would also mean that the Centre might find it difficult not to replicate the same increases nationally

In the era of competitive populism, both Bhartiya Janata Party (BJP) and Congress have taken it to the next level in the forthcoming state elections to three north Indian states of Madhya Pradesh, Rajasthan and Chhattisgarh.

Apart from other sops, it is perhaps the massive hikes in minimum support price (MSP) that stand out in terms of their fiscal and financial impact on the exchequer, particularly when it is seen against the extension of the free food grains distribution scheme for the next five years.

The hikes in wheat and paddy MSP in the key states that contribute a significant amount to the central pool would also mean that the Centre might find it difficult not to replicate the same increases nationally for other farmers.

MSPs are announced for the entire country, and states can only give a bonus on top of them.

Immediately after coming to power in 2014, the National Democratic Alliance (NDA) government passed an order and directed the Food Corporation of India (FCI) to limit the procurement of wheat and rice in states that declare bonuses over MSP only to the extent of what is required for meeting their PDS needs.

Not only that, the Commission for Agriculture Costs and Prices (CACP), in its kharif report for 2023, had also advocated limiting paddy procurement from those states which announce bonuses over MSP or levy additional cess and surcharges.

The Central order, meanwhile, was issued to ensure that states don't arbitrarily declare bonuses over MSPs, which invariably leads to excess procurement and production. Then Central agencies are saddled with stocks which are in far excess of that which is required for PDS operations.

This, in turn, leads to a spike in the storage and transportation of the grains, further burdening the national exchequer.

If poll-bound states have to fall in line with the MSPs declared by the parties, then they will have to do so in violation of this Central order or bear the full expense of the surplus procured at above MSP rates. Or else, the MSPs announced now will have to be implemented nationally by the Central government.

If that happens, then what will it mean?

The New MSP

At present, for 2024-25 season, the MSP of wheat just announced is Rs 2,275 per quintal. The MSP for wheat announced by the BJP in its manifesto is 16 per cent more than the same at Rs 2,700 per quintal. Congress's manifesto promises wheat MSP, which is 12.5 per cent more than the present MSP.

In the case of paddy, it is even worse.

The current MSP of common grade paddy is Rs 2,183 per quintal. The MSP announced by BJP for Chhattisgarh is almost 42 per cent more than this, while that announced by Congress (at Rs 3,200 per quintal) is nearly 46.5 per cent more than the prevailing MSP.

For neighbouring Madhya Pradesh, too, the hikes proposed by BJP and Congress are 42 and almost 15  per cent more than the current MSP. The Madhya Pradesh Congress manifesto says that they won't buy at prices less than what has been mentioned in the document, though it doesn't explicitly say whether the rates will be MSP or not.

In the third poll-bound state of Rajasthan, both parties are yet to announce their manifestos, but going by the trend, it does not seem that both parties will resist bucking the same.

In Telangana, too, which is one of the major paddy producers, Congress has announced a Rs 500 per quintal bonus over the MSP while ruling BRS has also promised benefits. BJP is yet to release its manifesto for the state.

A big question here is whether the government wants to reach the targeted MSP in the first year of announcement or over a period of time. Assuming it wants to do so in the first year itself. Then, it would mean a significant addition to the national exchequer in terms of rising economic costs.

Not only that, even inflationary impact could be immense and, for crops like paddy, hurt India's export competitiveness in the world market. Abnormally, high paddy prices could outprice Indian rice from the world markets as and when full exports are allowed.

Some traders said if paddy price is around Rs 32-31 per kilogram then it would mean that rice won't sell much below Rs 50 in the domestic markets.

The problem on the procurement front is even worse.

"Such arbitrary hikes in MSP could have a negative impact on the fiscal deficit both for the states and also the Central government. Also, when you are selling for free. The second problem is that the announcements grossly undermine the role of bodies like the Commission for Agriculture Costs and Prices (CACP), which do elaborate calculations to arrive at the MSP and consider all relevant factors. Agreed, from the farmer's point of view, the MSP hikes might be good as at the state level production cost is different for different states, but then it also hampers diversification," Dr S Mahendra Dev, a former Chairman of CACP and ex-Director of Mumbai-based Indira Gandhi Institute of Development Research (IGIDR) told Business Standard.

CACP is the main body that fixes the MSPs for more than 20 crops every year.

Sukhpal Singh,a professor at IIM-Ahmedabad and  former chairperson of the Institute's Centre for Management in Agriculture (CMA) however feels that the high MSPs promised by both the BJP and the Congress in their manifestos acknowledge  the demand that the MSPs need to align with C2+50 per cent norm as laid down by the Swaminathan Commission, as against the  A2+FL cost matrix  currently practiced by the government.

"If you see the MSPs promised they are close to the C2+FL cost of production which Dr Swaminathan advocated. So maybe, the governments are now veering to the fact that they need to give an MSP which is equal or slightly higher than the C2+FL cost," Singh told Business Standard.

However, he questioned whether states can give MSPs independent of some concurrence by the Centre as these are announced by the centre.

The Procurement Conundrum

In the last three marketing seasons of 2020-21, 2021-22, India procured over 60 million tonnes of rice and around 40 million tonnes of wheat, against an annual requirement of about 55-60 million tonnes (of both wheat and rice) for operating the National Food Security Act (NFSA).

It was only in the 2022-23 marketing season that the procurement had dropped to around 75.27 million tonnes of both commodities, mainly due to a dip in wheat procurement.

The marketing season for paddy runs from October to September while that of wheat it is from April to March. The distribution is done all through a financial year.

Such high levels of procurement of wheat and rice at high prices invariably push up the economic costs, leading to an increase in the subsidy burden for the government.

The economic cost is the procurement price plus the storage and other incidentals and also the expenses on the distribution of the grains.

The CACP, in one of its latest price policy reports, said the economic cost of rice and wheat is about 25-30 per cent more than MSP, while excess stocks result in economic losses and put constraints on storage facilities.

To end this, the Commission said that the open-ended procurement policy has led to over-exploitation of groundwater resources and distorted cropping patterns.

"The Commission recommends a thorough review of the open-ended procurement policy to restrict procurement to meet requirements under National Food Security Act (NFSA) and Other Welfare Schemes (OWS) and other requirements and compensate the farmers for additional marketed surplus through Price Deficiency Payments," it said.

Disparaging the assured procurement of wheat and paddy as being detrimental to the soil health of the main growing states of Punjab and Haryana, the Commission had also said in one of its another report that assured procurement of rice and wheat has led to the very high share of paddy and wheat in total cropped area in Punjab and Haryana.

"It is evident that the share of pulses, oilseeds, maize and bajra in Punjab has continuously declined from 1980-81 to 2021-22 while the share of paddy has increased from 17.5 per cent to 40.2 per cent during the same period. The share of maize has declined from 5.6 per cent to 1.3 per cent, bajra from 1.0 per cent to 0.5 per cent, pulses from 5.0 per cent to 0.4 per cent and oilseeds from 3.7 per cent to 0.5 per cent during the same period.

Such distortions in cropping patterns have resulted in overexploitation of groundwater," the Commission said.

Elaborating further, it said that this (the rising share of paddy and wheat in the total cultivation of Punjab and Haryana) has resulted in declining water levels in various parts of the country.

"One of the major causes for the decline in groundwater levels is the introduction of water-intensive crops such as paddy and sugarcane into cropping patterns in certain areas of the country," the Commission said.

Paddy cultivation has resulted in over-exploitation of scarce water resources in States like Punjab and Haryana. 

"The share of blocks in the over-exploited category has increased from about 75 per cent in 2004 to 76 per cent in 2022 in Punjab and from 49 per cent in 2004 to 62 per cent in 2022 in Haryana," the reports said.

Sukhpal Singh of IIM-Ahmedabad feels that diversification requires not just a high MSP announcement or its promise but also procurement at such MSPs. 

"If the government seriously wants farmers to diversify from wheat and rice towards oilseeds and pulses,  it should announce similarly high MSPs for them and also procure these crops as done in case of  wheat and rice," Singh added.