Steep hike in kharif MSPs may cost govt ~350 billion

Cabinet decision comes a head of assembly polls in some key states

The Union Cabinet on Wednesday approved a sharp hike in minimum support prices (MSP) of kharif crops for the 2018-19 season in a bid to contain the farm sector distress. However, some farmers’ organisations argued that it was a small victory for them as the increased prices were still below the comprehensive cost of production. While the decision is being seen as a populist measure ahead of Assembly elections in Madhya Pradesh, Rajasthan and Chhattisgarh (big producers of kharif pulses, oilseeds and coarse cereals), it has also triggered concerns of a spike in food inflation.

The decision will imply a dent of ~150 billion to the exchequer immediately, according to officials. Sources, however, said that was a conservative estimate and the final figure could be more than double at around ~350 billion once the purchase price of oilseeds and pulses was taken into account.

With but one agricultural season remaining for general elections, the Bharatiya Janata Party-led National Democratic Alliance (NDA) government has given the strongest upward push to minimum support prices (MSPs) in its tenure for major kharif crops for 2018-19 season.

The recent jump is exactly in consonance with the trend visible in the last two decades, coinciding with the tenures of last four Union governments. The rise in MSPs is steeper in a pre-election year, or immediately following an election year, than the years in between, shows a Business Standard analysis of data from Commission for Agricultural Costs and Prices (CACP).

Secondly, if we compare the performance of the two NDA governments with that of the Congress-led United Progressive Alliance (UPA) years, the five-year growth in MSPs in United Progressive Alliance (UPA)-I and UPAII was better than Vajpayee-led NDA and Modi-led NDA, it shows.

The analysis has been done for six select crops: paddy, jowar, tur, moong, soyabean, and cotton.

“The government should be commended for its effort,” said Rajiv Kumar in an interview earlier in the day, while categorising the sharp MSP growth in 2008- 09 under the Congress as purely political.

But Ashok Gulati, agriculture economist and CACP chairman in 2008- 09, says the international situation was starkly different that year, and it was the most important reason for the steep rise in MSPs then.

“International food commodity prices were at their peak, higher than domestic prices, and raising MSPs made economic sense. The sharp rise in MSPs did not push domestic prices of food products above international prices,” he told Business Standard.

This time, the situation is reversed. Though market prices in India are depressed, international prices are lower than domestic prices for major commodities. “The current sharp increase in MSPs would push domestic prices further upward (away) from international prices, and the government will have to procure almost all crops, which is next to impossible,” he said.

The growth in MSPs under the reigns of two ideologically opposite political competitors is evident for all six crops analysed. Take the example of paddy (common grade). During Vajpayee-led NDA government from 19992000 to 2003-04, its MSP rose 18 per cent. In the two UPA terms, its MSP rose by 79 per cent and 31 per cent in the two five-year terms. Under the current NDA, its MSP has risen 29 per cent from 2014-15. That for tur (red gram) grew 23 and 30 per cent under NDA tenures, while 44 and 87 per cent under two UPA terms. Close to the 1999 general election, the average rise in MSP for the six select crops was near 8 per cent. In the years to the run up to 2004 election, increases in MSP were moderate.

Similarly, in 2008-09, year prior to 2009 general election and 2012-13, two years before the 2014 general election, the respective governments showed a stronger resolve towards farmers’ welfare. While political scientist and president of the political party Swaraj India, Yogendra Yadav, agrees that higher MSP actually benefits farmers, noted agriculture economist and professor at Jawaharlal Nehru University, Himanshu, says that it is not necessarily so.

“The erstwhile Congress government ramped up procurement following the highest MSP boost in 2008-09, but was unable to use the stocks for public distribution efficiently,” says Himanshu.

Unless the government is able to channelise the procured pulses to the intended beneficiaries, using public distribution system or any other channel, even a good amount of procurement would not serve the purpose, if it is unable to distribute or sell it,” he adds.

In a similar vein, even if the government procures all crops, it will not be able to unload the stocks, says Gulati. “Suppose the government procures all bajra produced by farmers, where will it unload it at a price elevated due to the high MSP?” he asks.

The government cannot go against the market (prices) beyond a limit, else there will be no buyers for the costly products, he added.