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  1. Opposite to reform: Higher MSP is disaster in waiting

Opposite to reform: Higher MSP is disaster in waiting

The halo around “food-supply management” is out in the open. Four years ago, a new government started with the grand standing of economic policy-making: it would lower MSPs (minimum support prices) for cereals to help stabilise inflation.

By: | Published: February 12, 2018 5:20 AM
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The halo around “food-supply management” is out in the open. Four years ago, a new government started with the grand standing of economic policy-making: it would lower MSPs (minimum support prices) for cereals to help stabilise inflation. It would free-up markets for agricultural produce and take measures to boost productivity. Four years down the line, it has ended up promising MSPs for all crops!

This is the exact opposite of a reform agenda that emerged against a backdrop of excesses and failures of the previous government which, in the case of agriculture, relied upon generous MSPs backed by subsidies as marketing reforms were either delayed or postponed. Inflationary consequences followed, ending in macroeconomic instability. Restructuring that regime meant shifting away from MSP-linked, cost-based pricing policies to the one driven by market dynamics, building or restructuring existing markets by necessary changes to institutions and regulations, investments in storage and marketing infra, development of agro-processing industries and extensions to allied activities such as horticulture, etc. This gamut of reforms was sorely needed to stabilise output-price fluctuations and year-round supplies and thus resolve India’s festering structural problem of inflation, realise more revenues and value shares for farmers and provide new sources of non-farm employment to support incomes and absorb the surplus labour.

But by guaranteeing farm prices delinked from productivity and based upon costs, where shocks and deviations are many, this move takes agriculture in the wrong direction. It signals that agriculture marketing reforms stand discarded. The government intends creating an MSP monster when the course was to actually break up the MSP structure and remove price distortions. Together with recently introduced price-differential payment schemes such as Bhavantar, the entire policy direction is regressive and a step back from structural commitments underlying the new inflation-targeting framework. It will have serious economic consequences.

To be sure, the government restrained MSP increases under 5% in 2014-15 and 2015-16. Politically, these could be managed because the extraordinary fall in input prices from late-2014 helped preserve farmers’ margins and real incomes despite poor rains and low output prices in the period. Past buffer stocks kept cereal procurement low, enabled open market sales. Notwithstanding these tempering influences, administrative and trade policy measures were extensively used to manage supplies. Direct market intervention was preferred policy action also for managing output-price volatilities in perishables such as onions and potatoes, for which a Price Stabilisation Fund was set up in 2015. So the government got into the business of buying-selling onions, potatoes, and so on through building buffer stocks.

It further extended its reach and presence in agriculture markets with its aggressive intervention in pulses with disastrous outcomes: extreme price swings caused by production downfalls in 2015 followed by a super-bumper crop in 2016-17, as farmers responded to newly-introduced MSP incentives with direct procurement to build pulses’ buffer stocks (2 million tonnes), with further supplementation from large-scale imports and stocking restrictions. The public policy induced supply glut caused prices to collapse by August 2016, with pulses often sold below MSP and even under cost of production—while the government either faced forced over-procurement or poor quality buys depending upon divergence in market prices and MSPs of different dals! Clearly, MSPs failed in price signalling. The upshot of pulses’ intervention has been more volatility than might have been otherwise.

What about restructuring agriculture markets, related infrastructure and other changes to insure against price risks, output fluctuations?

A common e-market platform, e-NAM, was set up in 2015 to integrate 585 wholesale markets across India markets and so overcome barriers, increase selling options, improve price discovery and give higher returns to farmers, lower transaction costs, and stabilise supplies over crop cycles in the medium term. Value chains in major agri-commodities would emerge as result, it was claimed, as would storage and transport facilities. About 470 mandis and market committees have connected so far, while the recent Budget proposes to link 22,000 rural markets directly. Other reform initiatives were assured irrigation (Pradhan Mantri Krishi Sinchai Yojana), soil health management (soil health cards), news dissemination (dedicated Kisan Channel), organic farming (Paramparagat Krishi Vikas Yojana), conservation/development of indigenous cattle breeds (Rashtriya Gokul Mission), boost investment in food processing (Krishi Sampada Yojana), steady increases in institutional credit volumes, and so on. More have come in Budget 2018-19 as well.

But the measures of the last four years have not made any tangible impact on the ground. The dependency upon MSPs has risen in the period and at the fag end, there is a swing towards wider coverage of cost-based MSP policies!

Above all, the sharp recourse to MSPs is an adverse signal about marketing reform prospects in agriculture, where a majority government was expected to be more effective than a coalition. Two, it implies continuation of periodic agrarian crises, whether driven by MSP policies causing surpluses and deficits or by inclement weather. It is apparent from history and experience, as recently as in pulses, that higher MSPs don’t necessarily fetch better value to the farmer, nor prevent distressing surpluses and price crashes. But ample storage, warehousing facilities and farm-to-retail supply chains do. But that is not for Indian farmers. Three, the distortions inflicted by MSP-based policies will further magnify, affecting not just prices, but cropping patterns, deteriorations in soil quality, water tables, and so on. There are other spillovers too, the most serious being deterring fresh, private investments in the sector—investors are attracted by freeing markets, not by restricting free play. Why would price guarantees not impact incentives for direct selling through e-NAM and local market development for example?

Ashok Gulati points out that cost-plus pricing of MSPs of any hue is risky in that it entirely ignores the demand side, ie demand-supply, domestic and international price trends, terms of trade, inter-crop price parity, etc. And both Gulati and Sunil Jain have pointed out how markets can be manipulated by traders under price-deficiency payments in Madhya Pradesh.

Four, at the macro-level, the perpetuation of and in fact, a deeper penetration of MSP structure will adversely affect trade and inflation. Restrictive trade policies, a complementary tool in such regime, cannot but thwart farm exports that at their peak were almost 14% of the total in 2013-14. Inflation, whose persistence is attributed to food prices linked to cost-based MSPs, and which determine inflation expectations of households, will remain subject to same old pulls and pressures. If credibility of inflation control under the new monetary policy framework was structured around breaking the costs-wage price spiral, then extended MSP-programmes pegged to the cost base are designed to do the exact opposite—impart persistence instead!

To finish, China started its economic development by agriculture reforms, moved on to manufacturing and now, its services sector. India, once again, is an outlier—it started with services, then manufacturing, but is still vacillating where agriculture is concerned.

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