In an uncertain world, minimum support price (MSP) is the ultimate expectation of most farmers. Our analysis shows that in its two terms, the NDA government has given only a moderate hike in the MSP of pulses, if it is adjusted for inflation.
The latest flashpoint over MSP is the agitation in Haryana where farmers are realising only Rs 2,800-3,500 per quintal for sunflower while the MSP is Rs 6,400 per quintal. The irony is that sunflower is an oilseed crop and it is promoted as an alternative to wheat. The market price of mustard has also ruled below MSP this year in the largest mustard-producing state of Rajasthan. It ranged from Rs 5,140 per quintal in February 2023 to Rs 4,648 per quintal in May 2023 while the MSP was Rs 5,450 per quintal.
Until 2020-21, India was producing a large surplus of wheat and rice and the procurement was much more than the requirement of PDS and welfare schemes. The MSP regime attracted criticism as assured procurement of rice in Punjab and Haryana has led to the depletion of the underground water table.
Formula For Fixation Of MSP
In the Union Budget for 2018-19, a year before the parliamentary elections of 2019 (April and May), the government announced that henceforth MSP will be fixed at least 50 percent above the paid-out cost. While recommending the MSP to the Union government, the Commission for Agriculture Cost and Prices (CACP) considers several factors including cost of cultivation, demand and supply, trend of prices, and inter-crop price parity. etc. Since 2019, however, most MSPs have remained about 50 percent above A2+FL where A2 is the inputs bought by the farmers in cash plus and FL is the imputed cost of family labour.
However, the policymakers do recognise that MSP should also be used as an instrument of incentive for the diversification of agriculture.
Increase In MSP In Nominal Terms
We have compared the MSPs declared by the NDA government (kharif 2014-15 to Kharif 2023-24) and the UPA government (kharif 2004-05 to Kharif 2013-14). We find that in nominal terms, the UPA government had given a higher increase in MSP. The same exercise has been done for Rabi but the MSP for Rabi of 2023-24 will be declared later. So, that has not been considered.
During the UPA period, the average compounded annual growth rate (CAGR) of MSP of various crops including paddy, wheat, gram, tur, urad, cotton, moong and soybean (yellow) was between 9 percent and 14 percent. The maximum CAGR of MSP was seen in Moong (13.8 percent), Urad (13.2 percent) and Tur (13.2 percent). Soybean (11 percent), paddy (9.9 percent) and wheat (9.1 percent) were also encouraged by granting a handsome increase. The UPA government had given a substantial hike in MSP of wheat and paddy from 2006-7 to 2008-09. This was in the wake of the food crisis of 2004-06, when the government had to import 5.5 million tonnes of wheat.
During the subsequent 10 years of the NDA government starting from 2014-15, the MSP has grown at a comparatively modest rate of 4.3-7.1 percent per year in nominal terms. The average annual growth rate of wheat and paddy was 4.3 percent and 5.4 percent, respectively. The MSP of urad (5.3 percent), moong (7.1 percent) and tur (5.4 percent) was also increased moderately.
Increase In MSP In Real Terms
For understanding the increase in MSP in real terms, we use Consumer Price Index-Agriculture Labour (CPI-AL) for deflation. We find that in real terms, the CAGR of MSP of Kharif pulses in the NDA regime is lower as compared to the UPA period.
The CAGR of tur was 1.3 percent during the NDA period as compared to 3.7 percent in the UPA period. In the case of urad, the CAGR is 1.2 percent in the NDA period versus 3.5 percent in the UPA period.
During the NDA period, the CAGR of MSP of wheat and paddy is quite moderate but it is higher than in the UPA period in real terms. Under the UPA, this was negative 0.2 percent for wheat due to high inflation.
Good Inflation Management By NDA
The high increase in the MSP announced during the UPA regime is considered to have contributed to high food inflation. The management of food inflation has been much better during the NDA government and despite the Covid-19 pandemic and the global crisis in the wake of the Russian war on Ukraine, it has been able to hold the inflation at 5.1 percent vis-à-vis 8.1 percent average inflation during the UPA regime.
A number of measures were taken by the NDA government in its early years to manage inflation. These included the sale of wheat from bulging stocks, and the setting up of the Price Stabilisation Fund (PSF) which enables the purchase of agricultural produce even at the market price, which can be higher than the MSP. It has been used to purchase pulses and onions.
The NDA government has also been enabling cheaper import of pulses and edible oils due to which the prices of some of these items have ruled below MSP. Gram, mustard, and sunflower are examples of this. Domestic MSP should ideally be protected by adjusting the import duty. But inflation management takes precedence over farmers’ income. The NDA government had amended the Essential Commodities Act to restrict its own powers to intervene. But the law was repealed and it has been used quite frequently to impose stock limits. In addition, the export of wheat, rice and sugar has been banned or restricted.
These steps for inflation management would have had an impact on farmers’ income which was sought to be doubled in real terms by 2022-23.
Siraj Hussain is a former Union agriculture secretary. Kriti Khurana is a PhD scholar of economics at BITS Pilani, Hyderabad. Views are personal, and do not represent the stand of this publication.
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