Can the increase in MSP for paddy help boost its yield?

The announcement came against the backdrop of a crisis in wheat production and should be weighed against three considerations.

On June 8, the government announced minimum support prices (MSP) for kharif crops for 2022-23. MSP for paddy saw an increase of ₹100, or 5.15%, over rates for 2021-22, and support prices of jowar, moong, and oilseeds such as soybean, sesamum, and sunflower seed saw a healthy increase as well.

The announced rates for paddy, recommended by the CACP in March, reflect a larger absolute increase in MSP over what has typically been observed over the last decades. (Gurpreet Singh/HT Photo)

The announcement came against the backdrop of a crisis in wheat production.

The combination of a dismal increase in MSP for wheat in 2021-22 by only ₹40 (or by 2%), shocks to wheat prices in international markets due to the Russia-Ukraine war, and the adverse impact of soaring temperatures in March, resulted in lower than expected procurement of wheat, forcing the government to announce its ban on wheat export — the total procurement of wheat by the Food Corporation of India and state agencies stands at 18.72 million tonnes, compared to 43.34 million tonnes procured in 2021-22.

What was surprising about the wheat fiasco was the lack of preparedness of the government. The announced rates for paddy, recommended by the Commission for Agricultural Costs and Prices (CACP) in its price policy report released in March, reflect a larger absolute increase in MSP over what has typically been observed over the last decade. The expectation is that higher MSP will induce increased procurement of rice in 2022-23, and allow the government to substitute rice, to some extent, for wheat, in the various channels of public distribution of food grains.

This announcement should, however, be weighed against three considerations.

The first is that the recommended MSP this year is higher because CACP projects farm input costs to be higher. The wholesale price index of farm inputs rose aggressively in 2021, particularly since July, and is expected to continue to rise this year as well. The announced MSP for paddy is expected to provide a margin of 13% over projected comprehensive costs (or C2) per quintal (note that farmers’ long-standing demand is assurance of 50% returns over C2). In 2021-22, this margin for paddy was 12.3% over C2 and in 2020-21 it was 12%. The relative increase in MSP is, therefore, not as impressive.

The second consideration is that the bulk of the CACP report appears to be drafted before the Russia-Ukraine conflict (which escalated in February). The report only mentions the tensions between the two nations, with reference to potential disruptions in the import of sunflower oil. The impact of the conflict on fertiliser supply, global crude oil prices, and the resultant spike in fuel and other input prices could not have been accounted for in the projections of the CACP. Therefore, it is highly likely that farm input costs for kharif crops will exceed projections in 2022-23, and the projected margin of 13% over C2 will not be realised.

It is surprising that while the Monetary Policy Committee of the Reserve Bank of India revised its inflation projections for 2022-23 twice after February, from 4.5% to 6.7%, the government failed to account for these changes even as it accepted the CACP recommendations in toto, once again reflecting a lack of preparedness and an inability to learn from past mistakes.

The third consideration relates to inflation as well. According to the May 12 statement of the ministry of statistics and programme implementation, rural India experienced higher inflation than urban India in March and April, both when measured via the Consumer Price Index (CPI) and the Consumer Food Price Index (CFPI). Year-on-year CPI in April for rural India was up by 8.38%, compared to 7.09% for urban India. This is because food and fuel, the two categories that have experienced the most steep price rise, have a proportionately greater share of the rural consumption basket.

Given the relentless rise in food and fuel prices, the relatively higher MSPs announced for kharif crops may not be enough to safeguard farmers against rising input costs and declining purchasing power — especially smaller farmers who are net buyers of food grains. Moreover, agricultural workers are likely to lose out more in the short-run because the upward adjustment of nominal wages takes time.

In the face of increasing costs and prices, the need of the hour is an expansion of the public distribution system, and wider distribution of key inflation-hit products such as edible oils and food grains. MSP for several oilseeds such as sunflower seeds, soybean, and sesamum have witnessed a healthy increase in line with the government’s longer-term strategy to realign India’s agricultural basket in favour of oilseeds and pulses. However, whether the hike in MSP for oilseeds will prevent a dip in procurement (as was observed in the case of wheat) remains to be seen, and will depend on the trends in international and domestic prices — if market prices continue to increase and exceed MSP, then private traders are likely to swoop in and build stockpiles. In an ideal situation, the government would track inflationary trends over the next few months, and adjust MSPs before procurement in order to ensure sizeable food stocks and prevent private stockpiling. But are they willing to learn from past mistakes?

Srishti Yadav teaches economics at Azim Premji University

The views expressed are personal