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Increasing MSP Not Always Desirable

By Ramesh Raja
In Agriculture
July 23, 2015
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minimum-support-priceThe issue of minimum support price (MSP), a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices, is back in the news for quite some time now. Why would it not? The cabinet committee on economic affairs (CCEA) has increased the MSP for rice by Rs 50 per quintal in the 2015-16 season. This works out to a 3.6 per cent increase over the MSP of Rs 1,360 declared last year. The government has also substantially raised the MSP for all pulses and gave Rs 200 per quintal as a bonus over the Commission for Agricultural Costs and Prices proposal.

The impact of MSP, however, will depend on how the monsoon plays out. If the monsoon is bad, the MSPs do not matter as market prices will be higher and farmers will prefer to sell to the trader instead of the government. But if the monsoon goes well and we have a good harvest, the government may have to add a bonus to the declared MSP (on paddy) to prevent open market prices from crashing.

The Cabinet decision, meanwhile, showed that the government was economically judicious even while it is focused on the politics. As per economist Sonal Verma of Nomura Holdings, “The stress in rural incomes could have forced the government to
announce a higher MSP but by sticking to a modest hike the government has indicated that it is giving importance to economics
over politics.” The hike of Rs 50 is modest and in tune with the hikes in past two years, given that cost of production have kept low and global food prices are at their lowest. “The hike is consistent with the fundamentals of the economy and will ensure that inflation remains stable,” Verma feels.

Echoing Verma, Saugata Bhattacharya, chief economist of Axis Bank, believes the hike in MSP is politically generous and economically rational decision. He feels the hike balances the need to control infl ationary pressures and it is a good, middle path that the government has chosen. “Although the hike is lower, we have to recognise that at this time last year, input prices were still high,” Bhattacharya compares. On the other hand, Ashok Gulati, former chairman of Commission for Agricultural Costs and
Prices, feels the government could have been a little more liberal, and MSP could have been hiked more.

Considering the MSP for moong, which was hiked by Rs 250 per quintal, tur (arhar) and urad support prices, which were each raised by Rs 275 per quintal, the development is expected to give a strong price indication to farmers to increase acreage and invest for increase in productivity of pulses. In the meantime, the Cabinet also directed that a credible procurement mechanism for pulses and oilseeds be put in place if the need arises. A decision to import pulses was also taken recently. It is expected that these measures complement endeavor to keep a check on the price rise in pulses.

According to Sudhir Panwar, a farmers’ leader from Lucknow, Uttar Pradesh, and a member of the state planning commission, the current NDA dispensation wants to keep crop prices low as managing food inflation is its top priority. So farmers’ profitability is sacrificed for the sake of the overall economy. As for pulses, he says, the issue is multi-pronged. “The ruling market prices are higher than the MSPs declared, the government does not procure pulses and it is rainfed and therefore, a risky crop. All these factors are leading to lower production and the hike in MSP is not going to correct the situation,” Panwar elaborates. It may be noted that MSP was fi rst announced in 1966-67 in the wake of Green Revolution to make it success. Initially, it was announced only for wheat but over time it was extended to cover more crops which has now reached 25, including foodgrain, pulses, oilseeds, sugarcane and cotton. The government decides the support prices for various agricultural commodities after taking into account the recommendations of Commission for Agricultural Costs and Prices, views of state governments and ministers, and other relevant factors. The Department of Agriculture and Cooperation implements the price support scheme for oil seeds and pulses through the National Agricultural Cooperative Marketing Federation of India (NAFED),
which happens to be the nodal procurement agency for oilseeds and pulses, apart from the Cotton Corporation of India. So, when the prices of oilseeds, pulses and cotton fall below MSP, NAFED purchases them from the farmers.

Although experts are divided in their opinion about the role MSP plays in the agricultural economy, a higher MSP does not prevent an agrarian crisis every time, especially when it is caused by aberrant weather conditions. Even though an attractive MSP emboldens a farmer to raise more of a crop that brings him better incomes, on the flip side, it can also lead to excess production of a crop, leading to a surplus and consequently, a crash in its open market price. Not everything a farmer produces is procured under the MSP regime. Overly high MSP for a set of crops can also cause scarcity of the others, which are not offered attractive MSP. As such, the decision of increasing MSP has to be carefully calibrated with regard to market realities.

MSP-graph

The government has been procuring foodgrains at higher MSPs despite unhealthy stock

A strong case in point is the preceding UPA government during which the farmers did not benefit from the big increases in the
support price. While the MSP for wheat rose at compounded annual growth rate (CAGR) of 9.1 per cent between 2004-05 and 2013-14, Rice was up 9.9 per cent CAGR during this period. Similarly, Sugarcane was up 12.2 per cent besides arhar dal, urad dal and moong dal which were up 13.4 per cent, 13.2 per cent and 13.8 per cent, respectively.

These hikes aided transfer of wealth from consumers to producers in rural areas. That helped raise rural incomes and the  resulting wealth increased demand for consumer goods from rural areas, when demand collapsed in urban areas following the break out of the financial crisis. Correspondingly, wages of farm hands too increased, furthered by better price for farm produce as well as by the Mahatma Gandhi National Rural Employment Guarantee Scheme, helping a further rise in rural demand. This
rural wage upsurge decelerated towards the last two years of the UPA dispensation.

However, increasing the MSP year after year is not always a  healthy strategy as it gives riseto inflation. Food inflation has remained elevated for years now. It also alters cropping patterns and incentivizes farmers to grow certain crops at the expense of others.

This has been happening for years now, especially with wheat. Sizeable quantity of wheat are procured at great price rots every
year. Most of the godowns are overfl owing, large quantities are stored in open and left to the mercy of weather and rodents. A recent news report revealed that the  uantity of foodgrains damaged in Food Corporation of India godowns across the country recorded a drastic jump over the last two years when the country lost more than 40,000 tonnes.

Taking a cue from the given issue, the government should preferably use MSP as a means to incentivise farmers to produce more of what people are consuming, as it is well familiar that consumption patterns of people are changing. While the feasting of cereals is gradually shrinking, those of proteins such as pulses and lentils are rising. Likewise, the consumption of milk and other dairy items is increasing. The country has witnessed severe dearth of pulses in the past, resulting in steep rise in its price. A sharp 30 per cent increase in the MSP for arhar dal in 2010-11 and then again a 20-30 per cent increase for pulses in 2012-13 helped bring more land under cultivation, thus helping control of scarcities and volatility in their rates.

Deteriorating water table in certain regions is another area of concern. Steep hike in MSP for water-intensive crops is said to beone of the prime reasons behind it. Although it’s up to a farmer what he wants to cultivate, paddy, maize and sugarcane are among crops that should preferably be raised in the water-surplus regions. But we find paddy being grown in Punjab where the  ater-table is falling and sugarcane being raised in areas around the drought-prone Marathwada.

While rabi crops are said to be less water-intensive in comparison  to their kharip counterparts, there are certain crops such as wheat which require more cycles of irrigation than other rabi crops like barley. Replacing wheat with barley, a highly water-efficient  crop, should be encouraged in semiaridregions such as Bundelkhand. Interestingly, as compared to wheat which requires six cycles of irrigation, barley needs only three. Even the input cost of barley production is 50 per cent less. At the same time, production and market price of barley is 20 per cent more as compared to wheat which makes it a very attractive proposition for the farming community.

Considering the current reality – surplus supply of a given crop and its falling consumption – the government should encourage
farmers to shift to crops that require less water. Only then the issue of MSP can be resolved, if not fully,then partly, for sure.