IN WHAT HAS by now become a somewhat ritualistic exercise every season, the Centre has announced an upward revision in the minimum support price (MSP) for rabi (summer harvest) foodgrains (wheat, barley, gram and lentil) and oilseeds (rapeseed/mustard, safflower), to be planted a few weeks from now. The saving grace this time is that, unlike in the past, the increases are small, as recommended by the Commission for Agricultural Costs and Prices, and the announcement itself comes well before the beginning of planting time.

Admittedly, the increase in the MSP has been somewhat restrained the last two years; yet, several questions crop up even in relation to the modest rise this time. While the intention of the hike may be to neutralise possible increases in input costs, the MSP, as it stands, seems to bear no relationship with domestic or international market prices. The MSP for wheat, at Rs 650 a quintal (an increase of Rs 10) translates to about $150 a tonne, which is 10-20 per cent higher than the international market price. Despite this, ironically, the domestic wheat prices at the consumer end are far higher, at over Rs 800 a quintal because of the wholly avoidable heavy taxes and the role of commission agents in major producing States, not to speak of unrestrained speculation by vested interests. Higher prices paid by consumers do not reach growers, but end up unduly enriching marketing yards (in the form of market cess) and lining the pockets of intermediaries (as commission payment).

The recommendations of at least two powerful committees a couple of years ago that looked at foodgrains pricing remain in cold storage. The large gap between cost of production and the MSP of wheat persists. The monotonous and vicious rice-wheat-rice cycle of cropping is yet to be broken. Oilseeds are no better. After the increase in the MSP for rapeseed/mustard (largest rabi oilseeds crop) by a whopping Rs 100 per quintal for four years in a row since 2002, which created avoidable distortions in the market, the hike this season is less than one per cent. But even at this level the MSP is far higher than international rates and divorced from the market price of rapeseed/mustard oil. No wonder last season, at the MSP of Rs 1,700 a quintal, the government procurement agency NAFED was forced to purchase close to 20 lakh tonnes of rapeseed/mustard which it is struggling to dispose of even now, while the processing industry found the MSP too high for commercial viability. Huge losses on procurement operation already run up by NAFED would, of course, be on government account. The problem could worsen in the ensuing season when harvest starts in March/April 2006. So much for fiscal consolidation and reducing the food subsidy burden.

Given the severe challenges that the average small and marginal farmer faces in raising crops, supply response to prices would obviously be rather limited. Higher prices by themselves do not translate to higher production. A whole lot of non-price and non-trade initiatives are necessary to increase production and productivity.

(This article was published in the Business Line print edition dated October 4, 2005)
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