Move to raise MSP for oilseeds may result in disappointment

If one were to believe news reports for kharif 2011, the Commission on Agricultural Costs and Prices (CACP) is keen to recommend a sharp hike in minimum support price for oilseeds, hoping that oilseeds production performance in the ensuing season will replicate that of pulses last year.

Any move to raise MSP for oilseeds with hope — merely hope — of an increase in output, may result in disappointment.

If the CACP cares to study closely the MSP and output data of last five years, it will be clear that the relationship is at best tenuous. It is well known that under Indian farm conditions, the supply response to prices is extremely limited. As for MSP, it is hardly an instrument to help growers raise production or productivity.

What happened to pulses in kharif 2010 season? Because the Government failed to pay adequate attention to pulses for long years, output growth substantially lagged demand growth that resulted in shortages. From 2007 onwards, the situation worsened to such an extent that open market prices of various pulses reached astronomical levels (closer to a historic Rs 100/kilogram level) by early 2010.

Hike in MSP

The Government was, therefore, forced to allow a substantial 15 to 30 per cent hike in the MSP for kharif pulses (arhar/tur, urad and moong). The acreage for kharif pulses expanded by around 20 lakh hectares to 125 lakh hectares.

It would be rather naïve to believe that this area expansion happened because of higher MSP. If anything, open market prices of pulses that ruled at extremely high levels for most part of the year encouraged growers to look at pulses as an option.

Additionally, higher pulses output in kharif 2010 came about through area expansion and through not increase in yields. Obviously, some other crops — more likely coarse cereals — lost out to pulses last season.

In case of oilseeds, take soyabean. In recent years, open market prices have invariably ruled anywhere between 30 and 50 percent of the MSP for soyabean; yet, crop production has stagnated in the vicinity of 100 lakh tonnes. For 2010, the Government estimates the crop size at an unprecedented 126 lakh tonnes, but no one in the industry or trade is willing to believe this number that is suspected to be exaggerated.

Groundnut

Such a massive harvest of soyabean ought to have created a glut and brought prices down; yet, the oilseed is trading at Rs 24,000 a tonne. On the other hand, the story of groundnut is even starker. The Centre raised MSP in 2008-09 to Rs 2100 a quintal (from the previous year's Rs 1,550 a quintal when output was a record 91.8 lakh tonnes). Yet, groundnut output actually declined and has never come anywhere near the 2006-07 record, despite hike in MSP to Rs 2,300/quintal.

There is danger in confusing correlation with causation. On occasions, there may be a statistical correlation between higher MSP and higher output, like it happened in case of pulses in kharif 2010. But to confuse such a relationship with causation would be naïve. Under Indian conditions higher MSP by itself is incapable of catalysing any increase in production. For that, one needs to seriously work on non-price and non-trade initiatives.

The policymakers have failed to meet that daunting challenge.

Production

An unjustified hike in MSP for oilseeds is most unlikely to make any significant difference to production. On the other hand, it will push the benchmark rate up and lead to inflation without any corresponding supply benefits. This is not to argue that oilseeds do not deserve a hike in MSP.

It is only to point out that any such hike is no guarantee of higher output. The sooner New Delhi realises this, the better.

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