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Tuesday, March 31, 2020

A political price

The hike in MSPs and the formula behind it is unsustainable, can lead to cropping distortions

By: Editorial | Updated: July 6, 2018 9:09:40 am
This increase, by 11.3-12.9 per cent over 2017-18, is the most significant of the MSP-related decisions announced on Wednesday.

Rice stocks in government granaries are currently about 70 per cent more than what’s needed for feeding the public distribution system and maintaining a minimum strategic reserve. The last two years have, moreover, witnessed record production as well as state procurement of rice. Yet, the Centre has raised the minimum support price (MSP) of paddy by Rs 180-200 per quintal for the current year. This increase, by 11.3-12.9 per cent over 2017-18, is the most significant of the MSP-related decisions announced on Wednesday.

Although the hikes in other crops such as bajra, jowar, nigerseed and ragi are even steeper — between 36.8 per cent and 52.5 per cent — these have no more than symbolic importance, as the MSPs are not backed by any meaningful government procurement. At a time when godowns are bursting with rice stocks and acreages under this water-intensive crop ought to be brought down, the latest increase will compound problems.

The sad part about the current MSP hikes is not just about it being political, or reversing a cautious fiscal policy and hawkish stance on inflation that has been hallmark of the Narendra Modi government. What is particularly unfortunate is that the very basis for MSP fixation has undergone fundamental changes. Until now, the determinants of MSP included not only cultivation costs, but also demand-supply and market price dynamics, inter-crop price parities, terms of trade between agriculture and non-agriculture sectors, and implications on consumer inflation.

All this has been replaced by a single pre-determined principle: Henceforth, MSPs will be set at 1.5 times the production cost. The higher the cost, the more is the MSP. So, farmers growing crops consuming more water and energy, with their production costs naturally higher, get rewarded through increased MSPs. And when there is assured procurement and payment as well, it results in more production of paddy and sugarcane — even if at increasingly uncompetitive prices globally.

Such perverse cost-plus pricing cannot sustain for long. It can even backfire politically. The new MSPs in cotton, groundnut and maize, for instance, are way above open market prices. If it leads to the private trade cutting down purchases and the likes of Nafed and Cotton Corporation of India not being able to fill the void, farmer anger may only grow. The time has come to consider extending the Telangana government formula: Pay farmers a fixed per-acre annual subsidy and let the markets, not state-determined MSPs, decide what crop they must grow. Also, scrap the Essential Commodities Act and end all trading, stocking, domestic movement and export restrictions on farm produce.

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