1. Editorial: Fixing the MSP policy

Editorial: Fixing the MSP policy

Move to incomes-support, for crops in short supply

By: | Published: June 22, 2015 12:40 AM

While the hikes in minimum support prices (MSP) have been the highest for pulses, few expect a production response to since, with little procurement of farm produce other than wheat and rice—and cotton once in 5 years or so—farmers find it too risky to grow other crops. As a result, if the monsoon does do poorly, chances are India will import even more pulses, and at higher prices since there is little global supply of the pulses India consumes—imports rose from $1.8 billion in FY14 to $2.8 billion in FY15. Imports of vegetable oils, similarly, have shot up hugely, from $7.2 billion in FY14 to $9.7 billion in FY15. Under the circumstances, the government needs to work on completely overhauling the current MSP policy where prices are announced for 21 products, other than wheat and rice, for which there is little procurement—there is 100% procurement for sugar in the sense mills are mandated by law to buy all production. For starters, MSPs should be announced for just 4-5 crops after studying where there is excess production and where there is excess import.

It is obvious, for instance, that India needs to produce more pulses since pulse inflation is very high. While it is the combination of higher MSPs and procurement that makes farmers grow more of a crop, getting FCI or other state agencies to step up procurement may not always be possible—in even the case of wheat and rice, procurement takes place in just 4-5 states. In which case, the options may be to give income support—pay cash to farmers directly in case prices fall below, say 75%, of the MSP. In the case of crops like palm oil, procurement is not even an option since the crop is a plantation one and it takes 5-6 years to start bearing the first output.

The way to fix the MSP-procurement cycle is to do a larger analysis of costs and benefits. The extra costs of rice and wheat are well known—just carrying the extra buffer costs around R7,500 crore each year while the actual purchases lock up another Rs 40,000 crore or more. There is also a high cost in terms of power, fertiliser and water subsidies. All told, between the Centre and the states, India spends around R2 lakh crore each year in these 3 subsidies, most of which are used up in the production of wheat, rice and sugar—indeed, the export competitiveness of wheat and rice would be quite different if these subsidies were not given. So, if the government wanted to double the area under pulses, it would need to look at what the profits from growing these are and compare this with wheat and rice.

Farmers could then be given a compensation if market prices fell below the MSP or they could simply be given a per acre subsidy—equivalent to the difference in profits between pulses and rice/wheat—to encourage the switchover.

None of this is terribly new thinking, indeed in even the UPA’s tenure, the government had been experimenting with a subsidy to encourage diversification. The problem, however, is that it was never scaled up to any meaningful level.

This is what the NDA now needs to do—keeping in mind the total subsidy outgo today, it needs to find a way to switch this between crops to get the biggest bang for the buck. It is this kind of work that the Niti Aayog needs to be doing.

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