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A floor high up

posted Nov 1, 2011, 5:04 AM by Puneet Goyal
If MSP alone is used to boost farm output, crops will be out-priced in the world market. Technology interventions are a better option.

It is natural for politically beleaguered governments to resort to populism. So, it is not surprising to see the ruling United Progressive Alliance (UPA) — following its heavy loss in the recent Hisar parliamentary bypoll with the added pressure of having to acquit itself creditably in the upcoming assembly elections in Punjab, Uttar Pradesh and Uttarakhand - announce an almost 15- per-cent-hike in the minimum support price (MSP) of wheat. At Rs 1,285 a quintal, this price (for the wheat to be sown from November and marketed over April-June) is more than double the Rs 640 rate farmers got for the 2004-05 crop, when the Congress-led alliance first came to power. Besides wheat, which is the main Rabi (winter) crop for the above poll-bound States, the Centre has also raised the MSP of mustard and chana (Bengal gram) by well over a third this time.

Some of these increases — notwithstanding the obvious electoral intentions and at a time when food inflation has touched 11.4 per cent - are justified, given the extent to which farmers' own cultivation costs have gone up. Over the last one year, agricultural wages have risen by up to 50 per cent, with fertilisers, too, becoming costlier by 50-90 per cent, depending on the nutrient.

There is also evidence to show that the substantial MSP increases since 2004-05 have helped turn the terms of trade more in favour of farmers, inducing them to ramp up output. This is in contrast to the preceding 6-7 years, which was marked by falling farm prices (relative to other commodities) and stagnant production. The turnaround of sorts since then — noticeable even for pulses, where India harvested an unprecedented 18.09 million tonnes in 2010-11 - is significantly attributable to the recent price corrections.

That said, there are, however, limits to employing MSP hikes as a tool for boosting agricultural production. Domestic prices cannot, after all, rise beyond a point, where a crop gets totally out-priced in the world market (as with wheat now) or, worse, becomes unaffordable for a majority of the local population. A better solution would be technology interventions for improving yields — as has happened through Bt cotton or single-cross hybrids in maize.

The other aspect of MSP is its implementation. That, in the absence of effective procurement operations, the Government's declared floor price carries little meaning for most Indian farmers is a known fact. If the Government cannot procure on its own, there is no reason why the job cannot be entrusted to private players, selected on the basis of competitive tendering and transparent rules of MSP enforcement. Private procurement on Government account could even incentivise creation of a back-end rural marketing infrastructure, particularly in those regions and for crops where MSPs exist only in name.
(This article was published on October 27, 2011)