MSP albatross

The Centre’s grand announcement of an increase in the Minimum Support Price (MSP) of foodgrains by one-and-a-half times their cost of production is more of optics than anything substantive. It is still anybody’s guess as to when the new decision will be effective. Given the scale of complexities involved, it is not likely to be implemented in the coming kharif season. Finance Minister Arun Jaitley did not spell out a detailed financial template to back his announcement. In the absence of specific allocations for this purpose in the Union budget, the measure does not inspire much confidence among stakeholders. The key to the success of this programme is ensuring that the government puts in place a transparent mechanism to arrive at the basic price of the cost of production. At present, the cost of production is a vexatious issue. The Centre and the state governments do not see eye to eye on MSP of various farm produce. The yardstick adopted by the Commission for Agricultural Costs and Prices (CACP) to determine prices of agricultural commodities in the country does not reflect the actual cost of production in the country. The NITI Aayog is vested with the task of threshing MSP policies. But things are not yet clear if the Aayog will calculate MSP based on actual cost of the produce or the comprehensive cost that was recommended by the Swaminathan Commission. The decision, when it is implemented, will create more problems for farmers and state governments than it is meant to solve. First, there may be prevail different MSP in different states. It may so happen that people in the same state may end up getting different MSP as the cost of production will vary from region to region in the same state. The cost of production depends on many variables such as labour inputs, land cost, seed, fertiliser, water and family involvement. While the Centre has declared the basic template of MSP of foodgrains, the state governments will have to determine the cost of production in their states. The Centre funds the MSP programme from subsidies allocated to food. Inasmuch as agriculture is a state subject, it is likely that state governments may try to inflate the cost of production to ensure a fatter MSP for their farmers. Chances are that the MSP programme will provide a political handle to ruling parties to endear themselves to voters. As the formula has been laid down, the size of the MSP may go on increasing year after year. This will have an adverse impact on headline inflation. The Niti Aayog is likely to set a lock-in period for MSP before which states cannot revise the cost of production. The same principle may hold good for the state governments as well. The biggest upshot of this measure is its potential impact on inflation. There is a lot of debate on the ill effects of a sharp increase in food prices on inflation. As it is, slippages in GDP will push inflation up. Further, the implementation of HRA for Central government employees in the second half of this year will lead to a further upside in inflation. The Reserve Bank of India Wednesday stayed away from cutting the bank rates as it factored in a possible spiral in inflation going forward. In this light, a fatter MSP is definitely a matter of concern for the central bank. If not handled in a transparent and nuanced way, the MSP issue may end up as an albatross around the necks of future governments and the RBI.

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