Given the government no longer has the luxury of hiking minimum support prices (MSPs)—due to the impact this has on raising inflation rates—the government needs to look for other ways to fulfil prime minister Narendra Modi’s promise of ensuring a 50% return on costs to the farmers. While the UPA hiked MSPs by 97% for wheat between FY06 and FY12, and rice by 90%, the NDA’s MSP hike for wheat was just 3.6%—it is this muted MSP hike that experts say is one of the factors behind the sharp fall in inflation levels. A recent finance ministry paper points out that MSP hikes infuse additional funds into the rural economy which adds to inflation without hiking productivity. Net returns for wheat have been highest among cereals at 36%—they have been around 15% for paddy. During the two periods that the finance ministry paper has studied, 2000-01 to 2006-07 and 2007-08 to 2013-14, it found that food inflation was more than 5% in 20 of the 84 months in the first period and more than 5% in 76 of the 84 months in the second period—MSPs rose 12-56% in the first and 59-175% in the second period. The results clearly suggest hiking MSPs is a bad idea.
The correct way to increase farmers’ returns is to work on improving productivity. In the case of wheat, an increase in the yield from the current 2,583 kg per hectare to that of China’s 3,969 would mean the profits would go up by 53%. The way to do it is through better seeds and irrigation facilities and cash transfers. According to a CACP analysis, a simple 10% increase in the area under irrigation will increase the productivity by 6.4%, which gets boosted further if you include fertilisers as irrigated lands use more fertilisers and give better yields. Open up the agricultural markets and do away with mandi taxes and the middlemen that eat up the profits of the farmers in between, and the returns would start appearing robust without the inflationary pressure. Along with these measures, finance minister Arun Jaitley would do well if he pushes for the solution that has been suggested by the finance ministry paper in the FY16 Budget—in place of FCI procuring excess cereals and manage it poorly, have a leaner FCI with a much smaller ration shop system, and a farm-income policy and cash coupons for citizens.
