The increasing minimum support prices for wheat and rice over the years have led to rising food inflation, burgeoning procurement and buffer stocks as also growing food subsidy bill, a study has found.
This was found by a study conducted by the faculty at the Indian School of Business (ISB) here. It looked at the food policy and macro-economic trends in relation to procurement and other issues such as food inflation from 2005 to 2012. It found that the rising food inflation also contributed to increase in overall inflation.
Prof. Krishnamurthy Subramanian, faculty in Finance at ISB, said in case the production was high, the prices might be lower than the MSP. So, to bring parity between the open market price and MSP, the government would have to procure more than what needs to be supplied through PDS. An increase by one rupee per quintal in MSP increases the quantity to be stored ‘inefficiently’ by 2.26 lakh quintals for wheat and 3.48 lakh quintals for rice.
Explaining how rising MSP was pushing up food inflation, Prof. Krishnamurthy said if MSP was lower than the open market price, then the government would not have to intervene.
In case the production was higher and the MSP was higher than the open market price, the government would have to intervene and ensure higher procurement, which in turn would push up food inflation.’
He said this would make farmers to over-invest in MSP-supported crops while ignoring others such as pulses. While the demand for protein-rich foods has been increasing, the supply was not in tune with the demand and this mis-match was pushing up the prices of non-MSP supported crops. This in turn was contributing to food price inflation and overall inflation.
The study suggested cash transfers to farmers as potential solution to the problem. The cash to be given to the farmer should be the difference between wholesale market price and MSP.
Prof. Subramanian said if the open market price was Rs.500 a quintal and the MSP was fixed at Rs.600, then the farmer could sell it in the open market and the government could provide the gap of Rs.100. Instead of the government procuring at the MSP rate, through cash transfer the revenue outgo for government would be much less. This in turn would reduce MSP impact on food inflation.
