High school economics teaches you that you raise prices when you want more supplies of something. Conversely, when you want less supplies, you lower prices. Or, in the face of increasing input pricesas is happening in India at the moment with rising labour costs especiallyyou keep purchase prices constant. And when the idea is to get suppliers to diversify away from somethinglike lets say tobacco which causes health problemsyou reduce relative prices even more aggressively.
Which is why it has to come as more than a bit of a shock that, in the face of mounting wheat and rice stocksaround three times the levels requiredthe government is doing its utmost to further increase these stocks. Thats when, at the same time, there is no storage for around a fourth of this stock and the government is desperately trying to get rid of this stockthrough exportsin order to create storage space for the new crop. Earlier this week, the Cabinet cleared a R70 per quintal hike in the MSP for wheat for the coming season while the Commission for Agricultural Costs and Priceswhich has been in the forefront of the move to hike MSPs in various cropsactually recommended a standstill in wheat MSPs.
Apart from the fact that this adds to the food subsidy bill of R75,000 crore and drives farmers to grow more of the water-intensive wheat, more worrying is what could lie behind the hiked MSP. Chances are the government is preparing for the food security bill. If the food security bill is to cost over R6 lakh crore over three years as the CACP chief thinks, thats double what the government estimates. At a time when the budget is under strain, there is no rational explanation for why the government should want to raise subsidies so dramatically. Apart from the fact that the next general election is scheduled for 2014 and a gargantuan food subsidy bill may just go down well with the electorate.