Correcting past mistakes

By raising the minimum support price (MSP) of wheat by Rs 50 to Rs 750 a quintal, the government has carried out a price correction that was overdue. Unlike the 1990s, when the MSP was hiked liberally year after year to push domestic prices higher than those ruling in international markets, the annual increase since 2000-01 has been marginal""just Rs 10 a quintal, or around 1.6 per cent, a year. Last year, too, the MSP was initially raised by Rs 10 to Rs 650 a quintal, but subsequently a bonus of Rs 50 was offered when it became clear that farmers were unwilling to sell wheat to government agencies at that price. Thus, over the past six years, the MSP for wheat, which in a way serves as the bench-mark price at harvest time, has got disconnected from global prices and is no longer remunerative. The result has been paucity of stocks for the public distribution system (PDS) and also stagnation in wheat output. Fortunately, this year's price has been announced when wheat sowing has just begun, so farmers can chalk out their production plans after taking the new price into account.

The question is whether the MSP should have been raised still further, and whether it restores parity between domestic and international wheat prices""which has become a matter of importance now that the import duty on wheat has been waived. Wheat prices today are ruling higher than the new MSP in both domestic and global bazaars, and these may firm up further because of the dismal harvest expected in some key wheat-exporting countries, including Australia and Argentina. Thus, if indigenous wheat output is not enough, the government will find it difficult to source stocks for the PDS, whether through local procurement or imports.

It is important to bear in mind that the MSP has served, not just as the support price (as its name suggests and as was originally intended) but has, for all practical purposes, become the purchase price for government grain procurement. Last year's wheat procurement fiasco was, in a way, the result of this lack of distinction between the support price and the procurement price. There is little doubt that the government could have picked up more wheat from the domestic market had it been willing to offer a price even marginally higher than the MSP, as the private trade did. In fact, the National Commission on Farmers has recommended in its final report, released recently, that the government should procure grains for the PDS at the same prices which the private trade is willing to pay farmers. Such a move will not only ensure better returns to growers but will also not pinch consumers because healthy government inventories will ensure price stability in the open market during the lean season. Such a strategy will result in the government and the private sector competing for grain and operating in more markets across the wheat belt, thus ensuring better returns to a larger number of farmers in more states than is at present the case.