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Tuesday, July 17, 2018

Against the grain: Throwing caution to the winds

In its last year, the Modi government has abandoned its previous conservative policy on MSP hike

Written by Harish Damodaran | New Delhi | Updated: July 5, 2018 6:04:08 am
The government’s procurement of grain has steadily increased since 2000. (Express Archive)

The Narendra Modi government, in its last year in office, has played catch-up with the previous Congress-led United Progressive Alliance regime vis-à-vis fixing minimum support prices (MSP) for crops. This is especially in paddy and wheat, where the MSPs, unlike for other crops, are reasonably enforced through governmental procurement.

The cumulative MSP increase in paddy during the Modi-led National Democratic Alliance period from 2014-15 — after factoring in the hikes for the current 2018-19 kharif crop season announced on Wednesday — works out to Rs 440 per quintal for ‘common’ and Rs 425 for ‘Grade A’ varieties. This is more than the corresponding Rs 410-415 and Rs 350 increases over the UPA government’s second and first terms, respectively.

In wheat, too, the overall MSP hike in the Modi government’s first four years comes to Rs 335 per quintal, more than the Rs 320 effected during UPA-2, although below the Rs 450 under UPA-1. But with one more rabi season to go before national elections are due in about nine months — wheat is sown in November-December and harvested in April-March — even the UPA-1 cumulative jump could well get surpassed.

What differentiates the Modi government’s MSP hikes from the UPA’s, nevertheless, is its being back-loaded. The entire first three years of its tenure saw the MSP of paddy rise by only Rs 160-165 per quintal, lower than the Rs 180-200 increase just announced for 2018-19. Similarly, the wheat MSP was raised by Rs 50 per quintal in 2014-15 and by Rs 75 in 2015-16, before going up by Rs 100 and Rs 110 in the subsequent two years.

Simply put, the Centre, in its first three years, followed a conservative MSP policy on the lines of the first NDA government under Atal Bihari Vajpayee. The NDA-1 period witnessed an MSP increase of merely Rs 135 per quintal in paddy and Rs 120 for wheat over its entire six-year tenure.

The Modi government initially not only kept MSP hikes on check — which was consistent with its policy of inflation targeting formalised through an agreement signed with the Reserve Bank of India — but went a step further. In June 2014, it cracked down on state governments that were paying bonuses on top of the Centre’s MSPs.

The states were told that in the event of doing so — the BJP-ruled Madhya Pradesh (MP) and Chhattisgarh governments were giving farmers Rs 150 and Rs 200 per quintal, respectively, over and above the MSPs for wheat and paddy — the Centre wouldn’t procure beyond their internal public distribution system requirements. Any surplus grain procured would, then, have to be disposed of by the states themselves, who were to also “bear the financial burden in that regard”.

But now, with elections approaching, all caution has seemingly been thrown to the winds. The Chhattisgarh government, in November, declared a Rs 300 per quintal bonus on paddy that was extended not only to the 2017-18, but even the previous year’s crop. MP, likewise, came out with a “special incentive” of Rs 265 per quintal for the 2017-18 wheat, in addition to Rs 200 for the preceding year’s crop. Both states are also headed for Assembly polls in November-December; it remains to be seen whether they would announce bonuses for the current year’s paddy and wheat crops, too, before that.

What are the implications of the latest paddy MSP hike and a likely one for wheat as well?

For one, they will certainly result in more grain being bought by government agencies, as against the private trade. Government procurement of paddy and wheat has, as it is, been rising steadily since the start of this century. The 35.51 million tonnes (mt) of wheat purchased in the recent rabi marketing season accounted for 36% of the total estimated crop of 98.61 mt for 2017-18. Similarly, out of the country’s milled rice production of 111.52 mt, 36.18 mt has already been bought on government account and could reach 38 mt when the current marketing season ends in September.

Secondly, the higher MSPs may also render India’s exports, especially of non-basmati rice, uncompetitive. In 2017-18 (April-March), rice shipments from the country totalled 12.68 mt (8.63 mt of non-basmati and 4.05 mt basmati) and were valued at Rs 49,768.26 crore (Rs 22,927.06 crore of non-basmati and Rs 26,841.19 crore basmati).

Long-grain white rice from Thailand, with 5% brokens content, is now quoting at $ 400-420 per tonne free-on-board (fob), which, at Rs 68.5-to-the-dollar, translates to Rs 27.4-28.8 per kg. If a miller were to purchase paddy from Chhattisgarh or Odisha at the new MSP of Rs 1,750 per quintal, the corresponding rice price at two-thirds recovery will be Rs 26.25 per kg. Even assuming the whole cost of milling, including salaries and overheads, to be recovered from sale of husk and bran, there will be expenses on brokens (bringing down the content from about 20% to 5%), bagging, commission fees, local taxes and transport to ports such as Kakinada. That would take the total export price of Indian non-basmati rice to above Rs 30 per kg or $ 440 per tonne fob.

However, Vijay Setia, president of All India Rice Exporters’ Association, feels that the higher MSP will be absorbed in the global market. “This is because India is the world’s largest rice exporter. It has a near-monopoly over basmati, which anyway commands a premium, and can make buyers pay more even for non-basmati rice,” he says. The US Department of Agriculture has projected total world rice exports for 2018-19 at 49.496 mt, with India’s share at 13 mt, followed by Thailand (11 mt), Vietnam (6.8 mt), Pakistan (4 mt), Myanmar (3.5 mt) and the US (3.3 mt).

But to the extent exports are impacted, there would be that much less paddy/rice bought by private trade. That extra grain would, then, flow into government warehouses.

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