Pulses MSP hike ‘must be backed by procurement’

The Narendra Modi government has sprung into action to increase supplies of pulses through a raft of measures including clamping down on hoarders and importing the commodity in large quantities in the past few months to douse the price spiral. Now, the expert committee headed by Arvind Subramanian, Chief Economic Advisor, has suggested path-breaking reforms including hiking the minimum support price (MSP), effective procurement and lifting of bans to smoothen the supply of pulses and moderate prices. In an interview to BTVi, Subramanian says we need to think about new institutions to manage procurement of pulses. There is a need to relook at export bans and stock limits, and even considering futures trading, he said. Excerpts:

What were the main recommendation of the committee and how do we achieve them?

We have three-four main recommendations. The first is that we need to increase incentives by raising the MSP and then we need to back it up at with very effective procurement. You began by talking about the price rise. But, more recently, we are encountering or experiencing the beginning of the opposite development where prices have started to come down very rapidly. So, in a sense it is the volatility which is much more in the case for pulses that we need to minimise. And so the main way to do it is to boost domestic production and productivity because unlike cereals and other crops, we can’t import tur and urad. So we have to grow the pulses domestically. So we suggested raising the MSP combining it with effective procurement.

We also need to think about new institutions managing pulses. Another recommendation is that we need to look at some of the other policies that accompany this — whether it is the export ban, stock limits and futures trading... They are all sets of policies with good objectives. But we need to review them whether we need to be using them in the manner we do because we tend to be using very blunt instruments — bans or no bans. And, finally, we should really encourage science and development, because we need to raise yields, which is very low. And we need to be open to all kinds of technologies. And the good thing is that all these technologies are developed indigenously because not much R&D takes place overseas. So, I think, it is the package that we need to improve.

Where does the entire issue of futures trading actually come in place as far as the pulses price rise is concerned?

I think there is a notion that in principle you have a futures market for price discovery and stability. But clearly these kinds of markets have to be well regulated in order to perform their functions. So, I think, that if you have thin markets or poorly regulated markets, you in fact end up getting more volatility. And that is why the temptation is actually to impose bans and so on. But I think what we need to do is to see whether we can improve the functioning of these markets. It is possible. And even if you think about price fluctuations, for example, margin limits can go up if there is too much volatility. So there are many calibrated instruments and that is what we need to think about.

Coming back to the MSP hike recommendation, if the MSP goes up what impact will it have on inflation? Given that we do not have a proper supply side infrastructure, will this MSP initiative really give the desired output?

I think it won’t be inflationary because remember that the problem is that if prices start coming down very rapidly, then the supply in the next period is affected and we have got strong evidence for that. So I think we need to look at the whole question of inflation and non-inflation in a dynamic context and not just what happens today. And I think we provide evidence saying that in a more dynamic context, essentially if you boost the incentives for farmers to produce that is best way to keep the prices in check.

When will pulses prices and the inflation rate come down?

I think wholesale prices have come down dramatically. And if you look at the consumer price inflation, it has also come down dramatically. The only open question is how fast will pulses prices will come down? I am very hopeful that pulses prices will come down very fast because supply has increased dramatically.

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