The government announced recently minimum support prices (MSP) for wheat and a few other rabi (winter) crops. What distinguishes the latest announcement from previous ones are, first, it has come well in time, and secondly, the government, on this occasion, has not followed the usual course of bowing to populist pressure and raising the support prices beyond what was warranted by any economic logic. Because of delayed announcements in earlier years, farmers had been unable to derive the benefits of the signals that the MSP mechanism sends out. This year, however, the announcement was made right at the start of the sowing season for the winter crops — usually end-October. Therefore farmers can look at the MSP to decide on matters such as crop selection, whether diversification is feasible, and so on. The government too stands to benefit. The MSP mechanism can be calibrated to encourage farmers to diversify away from water-intensive crops to pulses and oilseeds. It is a moot point whether those objectives will be achieved this time, but the government cannot be accused of not trying.
The striking feature of the latest MSP announcement relates to wheat, the most important winter crop. In a sharp departure from the past, the MSP of wheat has been raised by just Rs.50 a quintal to Rs.1,400. The increase is the second lowest over the entire two terms of the UPA-I and UPA-II governments and is particularly noteworthy because it comes on the eve of elections in important States and general elections next year. Election-eve compulsions would normally have influenced the government to substantially increase the minimum support prices. Hikes in the MSPs of other winter crops such as barley and rapeseed-mustard are on the low side. The fact that high food prices are behind the persistently high headline as well as retail inflation has weighed with the government. The time has come to look at the MSP mechanism in its entirety. Over the years it has become the procurement price, thereby setting high floor prices for private trade which will continue to have a prominent role alongside the public distribution system even when the National Food Security Act becomes fully operational. The “bonus” awarded by some State governments over and above the MSPs, however, complicates the picture as it will drive the procurement prices even higher and leave very little for private trade. The fact that government godowns are overflowing with food stocks when cereal inflation is high is proof that all is not well with the government’s farm sector intervention, of which the MSP is an important component.