Freebie Season

Appeasing distressed farmers with high MSP might pay off politically but will increase the fiscal deficit


Acting on the 2014 Lok Sabha election campaign promise to fix minimum support price (MSP) at 50% over the cost of production, the Central government has finally rolled out the revised MSP list. It is a rather obvious political move than relief for distressed farmers and an attempt to secure the vote bank with only about nine months due for the 2019 General Elections.

However, what the government might have missed or chosen to ignore is the underlying reason of the agrarian crisis, that is, apart from the obvious adverse climatic conditions over the past years. Notwithstanding the extreme conditions, India had an all-time high rice production of 111 million tonnes in 2017-18. That might sound like good news of sorts, but the agricultural sector is reeling under what is called the problem of plenty. The country has been producing way more than the domestic requirement. This lopsided demand-supply ratio is making way for falling prices, pitiful income and high farmer's debt — not a bad yield.

India is clearly lacking proper infrastructure to store excess produce, and the stock of rice with the Food Corporation of India has been perpetually swelling beyond limits. So one can guess what a good monsoon and an even higher yield would amount to. To make matters worse, India’s rice exports are bound to shrivel now that Bangladesh, the top buyer, has imposed a 28% import duty on rice while its domestic production recovers from episodes of flash floods. It must also be noted that rice is a water-intensive crop. Given the water shortage faced by Indian farmers in certain states, boosting paddy cultivation is outright impractical.

Amid such circumstances, Prime Minister Narendra Modi declared a 1.5x increase in MSP. To that effect, paddy (common grade) has increased by Rs.200 to Rs.1,750 per quintal. This is almost a 13% hike in MSP in contrast to the 5.4% increase in the last fiscal. However, dearth of storage facilities might make this provision ineffective if the FCI ends up not buying the excess produce. With no alternative at hand to appease the farmers, the government hopes that keeping their poll promise and upping the MSP equivalent to the A2+FL cost (actual paid out cost and imputed value of family labour) would do the trick.

While the highest ever increase in rice MSP might be on shaky ground, the masterstroke here is the radical increase in the MSP of crops such as ragi, nigerseed and jowar. These coarse cereals — now dubbed as nutri cereals — constitute negligible percentages of the total output of kharif crops (whereas rice constitutes ~70%) and the proposed hike of 40-50% will hardly affect the exchequer. Coarse cereals are grown in arid and semi-arid areas and will definitely win over the farmers in Rajasthan, Madhya Pradesh and Chattisgarh. While all three have their elections lined up between November and December this year, the hike in MSP on nigerseed is an attempt to woo the farmers of Odisha, a state BJP has been trying to win over.

The move will push food subsidy beyond Rs.2 trillion as the latest increase will raise the bill by another Rs.150 billion. However, it seems the government is eyeing political triumph with little care for its economic repercussions.