The Narendra Modi government deserves credit for persisting with a policy of conservative increases in the minimum support prices (MSP), which may, indeed, be its most significant reform measure to date. For a second consecutive year, the MSP of paddy has gone up by just Rs 50 per quintal, or 3.7 per cent — something that would certainly strengthen the government’s inflation-fighting credibility and make it easier for the RBI to effect the interest rate cuts the economy desperately needs. But equally important, the MSPs for pulses have been raised by Rs 250-275 per quintal — roughly 6 per cent — mainly through the grant of a one-time Rs 200 bonus. The move isn’t going to be inflationary, given that open market prices are ruling way higher. Arhar and urad are, for instance, now wholesaling at Rs 7,200-8,300 per quintal levels, as against the announced MSP of Rs 4,625 for 2015-16, inclusive of bonus. In fact, the government could have gone in for a more substantial — say, 10 per cent — hike, if only to send a stronger signal to farmers to expand pulses’ acreages this time.
As a policy instrument, the MSP serves two broad objectives. The first is to give farmers a reasonable return to cover at least the cash expenses incurred on their crops, so as to prevent distress sales. The second is in influencing sowing decisions so that farmers plant crops keeping in view the country’s overall requirements. India today is surplus in rice, with public stocks nearly twice the necessary minimum buffer. In 2014-15, the country produced 102.54 million tonnes (mt) of rice, of which government agencies bought some 30 mt, and another 12 mt was exported. If, despite that, domestic rice prices have hardly risen, it only shows the extent of surplus — which is also the case with wheat, sugar or cotton. But this does not hold true for pulses, which are retailing around 50 per cent higher than last year, even after 4 mt-plus of imports in 2014-15. It is obvious, then, that the MSPs for paddy and wheat ought to be raised only marginally, if not frozen, while being substantially increased for pulses. The government has done that to some degree.
But mere MSP rationalisation isn’t enough. The government should physically procure pulses in the coming marketing season, both to tell farmers that its MSPs aren’t purely in theory, but also to build up a buffer against production shortfalls resulting in domestic as well as global price volatility. If the government can procure 30-31 mt of rice and 27-28 mt of wheat annually, it can surely afford to buy 3-4 mt of pulses that are mostly grown by relatively resource-poor farmers using less water and fertilisers.