New Headache for NaMo

Ahead of 2019 Lok Sabha Polls, the Modi govern­ment may have to shell out more to com­pen­sate farm­ers for low mar­ket prices of some crops un­der a plan an­nounced this year

The Day After - - BUSINESS ECONOMY - By dAnFEs Feed­back on:re­porter@dayaf­

Alow in­fla­tion spell in an elec­tion year should be good news for any govern­ment, right? Wrong. For Prime Min­is­ter Naren­dra Modi, the sub­dued in­fla­tion num­bers, due largely to low food prices, may present a bud­get prob­lem. His govern­ment may have to shell out more to com­pen­sate farm­ers for low mar­ket prices of some crops un­der a plan an­nounced this year with a view to dou­ble farm in­comes by 2022.

“In­dia’s fall­ing food prices could be­come a bane for Modi,” said Soumya Kanti Ghosh, Chief Eco­nomic Ad­viser at the na­tion’s largest lender State Bank of In­dia. “A bumper har­vest that’s led to crash­ing of food prices will in­crease the bur­den on the govern­ment to com­pen­sate farm­ers.”

In July, the govern­ment raised sup­port prices of crops such as cot­ton, soy­beans and paddy rice to en­sure farm­ers get at least 50 per­cent more than the es­ti­mated pro­duc­tion costs. That means in the event of a crash in mar­ket prices, the govern­ment would have to chip in and en­sure sale of the pro­duce by farm­ers at guar­an­teed prices.

The in­crease would cost the govern­ment an ad­di­tional 150 bil­lion ru­pees ($1.8 bil­lion), Home Min­is­ter Ra­j­nath Singh had said in July with­out elab­o­rat­ing. In­dia aims to keep its bud­get gap at 3.3 per­cent of gross do­mes­tic prod­uct in the fis­cal year to March 2019. But as the coun­try gears up for a na­tional elec­tion early next year, there are con­cerns that the govern­ment might not be able to stick to that tar­get.

Con­sumer food price in­fla­tion eased to 0.5 per­cent in Septem­ber from 2.8 per­cent at the be­gin­ning of this fi­nan­cial year in April. That’s helped bring head­line in­fla­tion within the cen­tral bank’s medium tar­get of 4 per­cent.

“Con­tin­ued de­cel­er­a­tion in food prices par­tic­u­larly in ru­ral ar­eas re­mains a se­ri­ous cause for con­cern and could open up Pan­dora’s box in an elec­tion year,” Ghosh wrote in a note.


How much the govern­ment needs to spend also de­pends on the method used by states to sup­port farm­ers. The govern­ment in Septem­ber ap­proved three plans that will en­sure a 50 per­cent profit over the cost of pro­duc­tion of crops in­clud­ing soy­beans, mus­tard and pulses.

Un­der the price-sup­port plan, govern­ment agen­cies will buy pulses, oilseeds and co­pra with the help of state gov­ern­ments, ac­cord­ing to the farm min­istry. The ex­pen­di­ture and losses due to pro­cure­ment will be borne by the fed­eral govern­ment as per norms.

Price-de­fi­ciency pay­ment plan is pro­posed to cover all oilseeds. Farm­ers will be paid the dif­fer­ence be­tween min­i­mum prices and the rate at which they sell their pro­duce in the mar­ket. Pri­vate com­pa­nies will also be al­lowed to buy some crops. The ex­ist­ing plans of the govern­ment to buy crops in­clud­ing paddy rice, wheat and cot­ton will con­tinue.

“Large scale pro­cure­ment of com­modi­ties by the govern­ment would strain its fi­nances and could lead to it miss­ing its bud­get goals,” said Si­raj Hus­sain, a se­nior vis­it­ing fel­low with In­dian Coun­cil for Re­search on In­ter­na­tional Eco­nomic Re­la­tions and for­mer farm sec­re­tary. “And it would also dis­tort prices in open mar­ket. The govern­ment should in­ves­ti­gate why prices are fall­ing.”

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