Macro Economy

Is Modi’s support price formula a recipe for food inflation?

VISHWANATH KULKARNI HARISH DAMODARAN New Delhi | Updated on April 27, 2014 Published on April 27, 2014

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Not necessarily, says ex-CACP chairman Ashok Gulati

Narendra Modi’s promise to fix minimum support prices (MSP) for crops by adding 50 per cent profits to farmers’ input costs has stirred up a debate on its implications if implemented by a BJP-led government under him.

One interpretation is that the move would further fuel food inflation in a possible drought year. But this also depends on what costs are included in the proposed formula for computation of MSPs.

The Commission for Agricultural Costs and Prices (CACP) normally considers two production cost estimates.

Which cost?

The first one, A2+FL, factors in all expenses in cash and in kind incurred by farmers – on seed, fertiliser, chemicals, hired labour, fuel, irrigation, etc – besides an imputed value of unpaid family labour.

The second C2 cost estimate is more comprehensive, while adding rentals foregone on owned land and interest on fixed capital assets.

If A2+FL costs alone are taken, the existing MSPs are already pegged 50 per cent higher, if not more, for most crops – barring paddy or pulses such as arhar, moong and urad.

“Implementing the 50 per cent profit formula won’t make much of a difference,” said Tejinder Narang, a grains trade analyst.

More of the same

The problem comes if Modi’s poll plank formula is applied by basing it on C2 costs. This would require substantial hike in MSPs across crops, including in wheat and rapeseed-mustard where these are now only 26-28 per cent above C2 costs (see table).

“That would definitely stoke inflationary pressures. Also, it only amounts to more of what the UPA did in its ten years,” said another analyst.

Between 2003-04 and 2013-14, the MSP of wheat alone went up from ₹630 to ₹1,400 a quintal, while rising from ₹550 to ₹1,310 for common paddy. Ashok Gulati, former CACP Chairman, however, felt that the promise of 50 per cent profits for farmers needn’t automatically imply sharp MSP increases, since Modi has also talked of raising irrigation coverage from the current 35 per cent levels and promoting water conservation technologies.

This, by boosting crop productivity, will reduce production costs for farmers. Secondly, Modi has proposed linking MGNREGA to agriculture, thereby meeting a part of farm labour costs.

“Both together can help deliver 50 per cent profits without necessitating steep MSP increases,” Gulati pointed out.

He estimated average profit margins for farmers over the last four years at roughly 35 per cent in wheat and 15 per cent for paddy. “You can raise these to 50 per cent by simply focussing on reduction in cultivation costs,”

Gulati added.

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Published on April 27, 2014
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