MSP hike is both bad politics and economics

The decision may provide some succour to agriculturists, but the claim that it would end farm distress is a gross exaggeration.

The Narendra Modi government is trying to sell the higher minimum support prices (MSPs) it announced recently as a measure to “end farm distress”. But, at the end of the day, the announcement, like many a loan waiver, is a populist move, not a cure. The cure is economic liberalisation in agriculture, whereas measures like MSPs and loan waivers are anything but reforms; indeed these are, as we shall see, the very antithesis of reforms, containing the seeds of more rural misery.

The government has increased the price of paddy by Rs 200 per quintal. The last hike of similar quantum, Rs 170 a quintal, came in 201213—that is, when the United Progressive Alliance government was gearing up for the general election. The latest hike is also poll-inspired, for the paddy MSP hikes were in the range of Rs 50-80 per quintal in the last four years. The higher MSP didn’t prove to be good politics for the UPA in 2014; this, however, hasn’t dissuaded the National Democratic Alliance to follow its vanquished rival’s policies.

Bad politics was also bad economics. In the four years under Modi, growth in the farm sector has been 2.5%, whereas the economy expanded at the rate of 7.2 per cent.

The UPA didn’t carry out reforms in agriculture; nor has the NDA government. In fact, it never intended to. The BJP had promised in 2014 to continue with the same statist policies; it had pledged to give farmers a price of 1.5 times of cost. So, the Commission for Agricultural Costs & Prices (CACP) calculated the production cost of paddy at Rs 1,166 per quintal; the government accordingly increased the MSP of paddy (common grade) by Rs 200 to Rs 1,750 per quintal for the 2018-19 season. The cost to the exchequer can go up to Rs 35,000 crore.

The government also hiked the MSP of cotton (medium staple) to Rs 5,150 from Rs 4,020 and that of cotton ( long staple) to Rs 5,450 from 4,320 per quintal. The MSPs of pulses have also been upwardly revised—tur to Rs 5,675 per quintal from Rs 5,450, moong to Rs 6,975 per quintal from Rs 5,575, and urad has been hiked to Rs 5,600 from Rs 5,400 per quintal.

Ditto with oilseeds. The MSP of soybean goes up to Rs 3,399 per quintal from Rs 3,050, that of groundnut (shell) to Rs 4,890 per quintal from Rs 4,450, sunflower seed to Rs 5,388 per quintal from Rs 4,100, sesamum to Rs 6,249 per quintal from 5,300, and niger seed to Rs 5,877 per quintal from Rs 4,050.

Announcing the decision taken by the Cabinet Committee on Economic Affairs (CCEA), Home Minister Rajnath Singh said, “This will send a positive message to farmers and boost their confidence and end farm distress.”

Well, the decision may provide some succour to agriculturists, but the claim that it would end farm distress is a gross exaggeration. As we mentioned earlier, the need of the hour is liberalisation in the sector; and that no political party is interested in. Not that they don’t know what should be done. In a 2014 lecture, for instance, Arvind Panagariya, a prominent economist who was chosen by Modi to head the Niti Aayog, had said, “To ensure that farmers get a larger share in the price of the produce paid by the consumer, the next government must complete the reform of the Agricultural Produce Marketing Committees Act in all areas, for all crops, and in all states. This requires giving greater play to the right to directly purchase and sell, facilitating the emergence of competing private marketing yards, expansion of contract farming, provision of cold storage facilities and the building of supply chains.”

Further, he wanted MSPs to end. In the same lecture, he said, “It is also worth considering replacing the minimum support price (MSP), and its associated procurement, by the equivalent of deficiency payments in the United States.”

Not much, however, has been done either to revamp APMCs or replace MSPs.

In October 2016, the Niti Aayog, which is headed by the Prime Minister, identified three key areas for re- form and began persuading states to undertake the reforms: agricultural market reforms, land lease reforms, and reforms related to forestry on private land (that is, felling and transit of trees).

It noted that while marketing is extremely crucial, “agricultural development in India has entirely ignored the potential of marketing and has continued to follow its old trajectory. Therefore, the benefits that can be accrued from agriculture are largely untapped. Productivity is some states is regrettably low and there is a vast disconnect between prices received by farmers and the prices paid by consumers.”

It also pointed out that “the poor state of reforms in the sector is also the primary reason for the nonperformance of agricultural food processing industry in India.”

Little has changed since then. The involvement of states is critical for the implementation of agricultural reforms, so this is the most opportune time for structural changes in the sector as most states are under the Bharatiya Janata Party.

Yet, politicians continue with bad economics, hoping that it would prove to be good politics. Hence loan waivers, special packages (the latest being for the sugar sector), and now higher MSPs. It wasn’t supposed to be like this. As Brexiteers celebrated a wholly unexpected result the morning after the Brexit vote, the country was supposed to free itself the shackles of the European Union and go forth and trade with the rest of the world like never before. Among the prominent campaigners was the UK government’s Indian Diaspora champion, Priti Patel MP.

On the second anniversary of the Brexit vote last month, 100,000 people marched in central London to demand a final vote on any UK exit deal. The ordinary person on the street knows less today about what Brexit means than they did in 2016. Much of the country is already bored hearing about the topic.

A more externally-focused Britain presents an opportunity for India to increase its influence and deepen the bilateral economic relationship.

In Prime Minister David Cameron’s first visit to India, he took a record trade delegation of around a hundred business leaders and made improved relations with India a footing. This has paid significant electoral dividends: in 2005, 76% of the Indian Diaspora in Britain voted for the centre-left Labour party, but by 2015, this fell to just 41%. Instead, Cameron increased the vote-share for the Conservative party from 16% to 49%.

Everywhere you see, the importance of India is evident: Britain’s largest private sector employer is an Indian company ( Tata); Britain’s Cabinet and highest offices are full of Indians; the UK has been the fourth largest investor in India over the last 16 years or so; in recent years, India has emerged as the third largest investor into the UK, ahead of Japan, France and Germany; London has emerged as a global hub for infrastructure and green bond issuance for Indian PSUs and private sector companies; and Indians are increasingly dominating the mainstream arts landscape, as the winners of the third annual Eastern Eye Arts, Culture & Theatre Awards on 22 June showed.

But bilateral trade has been flat since 2011—while Indian exports to the UK have consistently increased, UK exports to India have fallen steadily. The depreciation in sterling (against the rupee it fell 17% in morning trading the day after Brexit) has meant UK exports are becoming more competitive, with trade in the last few quarters picking up. In 2017, the UK was the 17th largest trading partner for India. India was the 18th largest trading partner for the UK.

In the Commonwealth Heads of Government meeting earlier this year in London, Prime Minister Narendra Modi was given a special welcome, which underlined the importance of India to Britain, both in a bilateral sense as well as through the Commonwealth channel.

Despite what one hears through the public affairs machinery in some parts of Westminster and Pall Mall, increases in bilateral trade opportunities will not come via the Commonwealth. The top eight Commonwealth countries (including India) make up 8% of the UK’s exports. All Commonwealth countries make up 9%. British exports to Germany are, roughly, more than the whole Commonwealth com- bined.

The India-UK bilateral trade ministers’ Jetco meeting in London this year explored various avenues of greater economic cooperation. The sense was that Brexit had focused minds to make Jetco into more of a deliverables-focused meeting.

But immigration has cast a shadow over bilateral trade discussions. The transition from David Cameron to Theresa May as Prime Minister has introduced a very clear hawkish tone towards immigration. Indeed, immigration formed a large part of the first bilateral discussion between PMs Modi and May when they met in Delhi two years ago.

It’s no secret that Indian student numbers to Britain have fallen from a high of 40,000 to 16,000 (before recovering marginally) due to stricter UK immigration rules. May has long held the view that many of these came to the UK to study at “bogus” colleges, and then stayed on illegally. The government had initially quoted a figure of 100,000 such undocumented immigrants, which has been consistently debunked. to India will remain strong and India will continue to be well represented in Westminster, for example. The recent launch of an investment fund focused specially on investing in British companies seeking to enter India is a case in point.

How the relationship grows depends also on the seat of power in Delhi. With elections in 2019, Indian government outreach activities towards the Indian Diaspora have been ramping up. His “Bharat Ki Baat Sabke Saath” interaction with the Diaspora in London in April was a much talked-about event amongst the Gujarati Diaspora. Given the largest portion of the 1.5m Diaspora is Gujarati, the buzz in Harrow, Southall and Leicester is certainly to welcome a new term for PM Modi. Outside these communities, Modi is still seen as the tallest leader in India, but there is a growing appetite for change. This marks a remarkable shift from just a year ago. Pratik Dattani is Managing Director of cross-border consultancy Economic Policy Group, and a former UK Director of FICCI.

The British government says it wants the country to go forth and trade more with non-EU partners. Parts of the government genuinely want to be outward looking, but then there is the Home OffiCe, whose sole purpose seems to be to ensure a restrictive visa regime to keep Brexiteers happy.