Column : The net effect of MSP

Written by Sanjeeb Mukherjee | Updated: Aug 29 2009, 02:45am hrs
The government recently increased the minimum support price (MSP) of paddy (de-husked rice) and pulses, two crops which have been in the news for very different reasons. While paddy is in the limelight because of the impact deficient monsoon has had on its sowinglatest data shows that sowing is now around 69 lakh hectares less than last year pulses have been in the news due to the sharp rise in their retail price over the last few months.

Interestingly,the government has responded to both problems with the same policy instrumentminimum support price. The government raised the minimum support price of paddy by Rs 100 per quintal, while the MSP of pulses was increased by around Rs 240 per quintal. Ostensibly, the MSP of paddy was increased (inclusive of the Rs 50 per quintal bonus) to maximize the governments rice procurement when the new crop season starts around October 1. This year there is a possibility of production falling by around 10 million tonnes. A production shortfall could push up retail prices. So the government is keen to build stock and control prices.

In the case of pulses, experts believe that the MSP was raised significantly to encourage growers to plant more lentils to recoup some of the losses incurred on account of low paddy sowing and to increase supplies which would bring down retail prices.

However, hiking MSP could have the perverse impact of raising prices further. And this will hurt many farmers who are also (often net) consumers of food. According to a NSSO survey of 2004-05, an average rural Indian spends around 55 paisa out of every rupee spent on food items, of which 18 paisathe biggest chunkis spent on cereals and cereal substitutes, while in urban areas, an average Indian spends around 43 paisa of every rupee on food items, again the biggest share being cereals that also include rice and pulses. Its a tricky situation but hiking MSP is unlikely to be sustainable. In the medium term, the government must invest more on agriculture infrastructure, particularly irrigation.