Implications of Enhancing Crop MSPs

What is the issue?

What is the extent of change in the MSP rates?

The Centre has recently cleared a hike in the Minimum Support Prices (MSPs) for the “kharif summer crop”.
The rise ranges from a modest 3.7% increase for urad to as much as a 52.5% for the cereal ragi over the previous season.
‘Commission for Agricultural Costs and Prices’ (CACP) is said to have gone by this cost-plus-50% principle - in accordance with government’s promise.
Significantly, for some crops the prices were considerably higher than the 50% mark - for Bajra, it was 97% above production cost.
On an average, the MSP hike notified for 17 kharif crops is about 25% higher and constitutes the biggest hike since 2013-14.
For MSP calculations, production costs were estimated by calculating the cost of farm inputs, and adding it to the value of unpaid family labour involved.

What are the implications?

Political - The announcement was clearly to appease farmers, who over the past year spearheaded widespread protests over the rural distress.
NDA government was hawkish towards MSPs in its initial years, and also cautioned state governments against doling out populist farmer schemes.
But with elections approaching, the current announcement is a clear indication that it has loosened its string and has subdued its concerns regarding inflation.
Economic - The impact of these hikes on ‘Consumer Price Inflation’ (CPI) is expected to vary between 0.5% and 1% by the end of 2018-19.
The Centre’s fiscal arithmetic may not be affected much if the outlay on procurement is around Rs. 15,000 crores (0.1% of GDP).
But these costs could mount based on the procurement strategy and the new mechanism for MSP enforcement.

What needs to be done further?

Structural - MSP mechanism is primarily enforced through official procurement only for wheat and paddy, and not other crops.
Hence, mere announcement of prices for other crops is unlikely to suffice in ensuring farmers get those returns.
The Budget speech had promised that Niti Aayog would work with centre and state governments to work out a mechanism to cover all crops.
While the status of this is not clear, it is speculated that it may include some sort of a ‘gap-funding mechanism’ to farmers if market rate falls below MSP.
Markets - Rural incomes may rise because of enhanced MSPs, but reforms to free agricultural markets are vital to prevent a distortion due to MSPs.
Easing onerous stockholding limits under the “Essential Commodities Act” and avoiding frequent curbs on farm exports are other things to be done.

Quick Facts:

Commission for Agricultural Costs and Prices (CACP):

It is an attached office of the “Ministry of Agriculture and Farmers Welfare”.
It is mandated to recommend “Minimum Support Prices” (MSPs) and incentivize cultivators to adopt modern technology, and raise productivity.]
CACP submits its recommendations to the government in the form of ‘Price Policy Reports’ for 5 categories of crops every year.
The categories are - Kharif crops, Rabi crops, Sugarcane, Jute and Coconut.
Importantly, while CACP recommends MSPs, it is the “Cabinet Committee on Economic Affairs” (CCEA) of the Union government takes a final decision.

Source: The Hindu