The Hindu Business Line : Oilseeds: Indiscriminate MSP hike not desirable

MUCH after the completion of planting for the 2004 summer harvest season, the Centre announced a hefty increase in the minimum support price (MSP) for rabi crops, including oilseeds — rapeseed/mustard and safflowerseed.

For obvious reasons, the revised support price is unlikely to have any impact on the acreage of the rabi crops — either rapeseed/mustard or wheat.

One more season has been lost without any overt attempt at crop diversification.

The Government cannot be blamed for the delay in the announcement of MSP because it was merely following the diktat of the Election Commission, which invoked the moral code of conduct in the context of polls in a few States early this month.

The hike of Rs 260 a quintal from the previous year's Rs 1,340 (comprising Rs 1,330 plus Rs 10 as special drought relief) resulting in MSP of Rs 1,600 a quintal for the 2003-04 season for rapeseed/mustard is high by any reckoning.

Between 1998-99 and 2001-02, the annual increase for this crop was a flat Rs 100 a quintal.

While growers will be happy with the increase in support price, the processing industry will not be because a higher MSP, by its very nature, raises the cost of raw material and, in turn, the finished product.

In announcing a steep increase in support price, the Government was obviously guided by considerations such as crop diversification, providing more encouragement to oilseeds vis-à-vis fine cereals and reducing the distortion caused by large differentials in support prices for fine cereals and oilseeds in recent years.

But the compulsory wait or forced delay in the MSP announcement — for whatever reason — had nullified whatever little prospect there was for acreage shift.

It is only because of fortuitous circumstances that prices of major oilseeds (groundnut, soyabean) in the country are ruling rather high — much above the MSP — despite a significant rebound in output.

A major reason for such price behaviour is the firm trend in international prices of oilseeds and oils under the leadership of soyabean.

In so far as this season is concerned, it is not the higher MSP announced by the Government but high international prices that are going to bring remunerative returns to oilseed growers here. The Government cannot claim any credit.

On the other hand, hiking the support price indiscriminately for reasons other than economic could prove to be dangerous over a period of time.

Importantly, higher support prices year after year without any serious endeavour to raise yields and/or reduce cost of cultivation could be self-defeating.

While raising the MSP may be politically expedient, it could be commercially suicidal. The negative impact of high support prices unrelated to market conditions would be felt in subsequent years when the world market returns to normal conditions or goes into a bearish phase.

Indian oilseeds will be rendered uncompetitive leading to lower domestic demand for crushing and higher imports of low-priced oils.

There is also an apprehension that oilseed growers may not be the full beneficiaries of the current high prices in the market.

This is true particularly of small and marginal farmers.

Because of boom conditions, commodities have started to attract funds.

A number of players — mostly speculators — are building inventory with the hope of a further price rise; and hedge their price risk in the futures exchange.

More often than not, speculators are the people who enjoy the cream of high and rising prices, and not the primary producers. Artificially jacked up prices hurt the processing industry too.

In 2003 season, rapeseed/mustard prices opened at about Rs 14,000 a tonne and over a few weeks, breached the Rs 20,000 a tonne mark. At the highest, the material was sold at Rs 22,000 a tonne.

However, farmers did not get the benefit of the price rise. Most of them had sold at prices ranging between Rs 14,000 and Rs 16,000 a tonne, while speculators creamed the market, it is widely believed.

While the price the farmer receives is an important factor in determining the choice of crop, under Indian farming conditions, the ability of farmers to respond to high prices with higher production is rather limited.

It is the admitted position of the Government that unlike rice, wheat, sugarcane and cotton, farmers do not and cannot raise oilseeds as a principal crop because of the extreme risk factor.

"It is a supplementary cash crop and a proverbial gamble amidst weather uncertainty", according to the Economic Survey 2002-03 which goes on to assert that relative yield rates of fine cereals and oilseeds determine the choice of crop.

So long as the yield rates of oilseeds are considerably low in relation to rice and wheat, doubling or even tripling of the MSP will not match the gross return per hectare.

Therefore, instead of tinkering with prices and/or acting merely on trade related measures, the policymakers must take a serious look at non-price non-trade initiatives.

Strengthening the input delivery system, scientific water management, educating farmers about agronomic practices, pre- and post-harvest measure, rural infrastructure (warehouses, roads, marketing systems) and information dissemination to enable growers to take an informed decision about marketing the harvested produce should become the focus of attention.

The State Governments and the private sector both have roles to play in this.

Forging public-private partnership for maximising farmers' welfare should be explored.

With boom conditions all round, the time is perhaps most opportune to address the issue.

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