Analysts say while the steep hikes in minimum support prices over the last decade have boosted rural incomes, they have also contributed to sticky food inflation, especially in the absence of adequate marketing reforms in the sector and infrastructure, reports fe Bureau in New Delhi. Given this scenario, for the current year, the Commission for Agricultural Costs and Prices (CACP) has suggested only modest increase in MSPs for most crops. For instance, the MSP of common-grade paddy, which has seen an average yearly hike of 7.6% over the last six years, is proposed to be hiked by just 3.8% for 2014-15.
The CACP, over the last three years, has sought to rationalise the farm pricing policy and move it away from its bias in favour of paddy and wheat. Of course, if the CACP recommendations are approved and a mid-term bonus (as announced in 2009-10, a drought year) is not offered despite a below-normal monsoon, that would not suffice to meet the new government’s stated objective of ensuring a 50% profit for farmers.
That means given the sticky inflation — WPI food inflation rose an annual 9.5% in May compared with 8.6% in the previous month — the government may have to defer its plan to implement a new formula for boosting farm incomes. Perhaps this could be one of the tough decisions Prime Minister Narendra Modi has planned to salvage the economy.
Take the case of the last drought year. While the CACP had initially recommended a Rs 50 hike in the paddy MSP for 2009-10, the government offered an additional bonus of Rs 100 per quintal, effectively raising the MSP by Rs 150 per quintal, or 16.7%, from a year earlier. Aided by a 6% drop in production, the hike in the MSP drove up grain inflation by 14.5% in 2009-10, apart from raising the food subsidy burden.