ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Minimum Support Price Hike


The central government has announced a fresh increase in the minimum support price (MSP) for kharif crops, making the new MSP 50% higher than the actual paid-out costs of production plus the imputed value of family labour (excluding the cost of the land). This has created a wave of dissatisfaction among political parties and farmer organisations like the All India Kisan Sabha, which claim that the rise in MSP is insuffi­cient and a mere façade as the government has ignored the recommendation regarding calculation of the cost of production as given by the M S Swaminathan Committee.

A fair judgment of the government’s decision can be made only by considering the current upsurge in the consumer price index (CPI) inflation alongside MSP rise; otherwise, it would be a disservice to the complex nature of macroeconomics. The trend of the CPI inflation is quite worrying. According to the Central Statistics Office (CSO), it has increased from a meagre 1.46% in June 2017 to 4.87% in May 2018.

Macroeconomic analysts contend that one of the reasons for increased CPI inflation is the higher MSP. An increase in MSP, which is supposedly the base for the market price of the crops, can potentially lead to higher market prices of crops and, hence, higher income for the agricultural sector. However, the fallacy lies in the fact that over the years, the ratio between input costs and output prices has remained approximately constant because of the constantly rising cost of the inputs.

Why are input costs (which include labour costs) rising? The former governor of the Reserve Bank of India (RBI), Raghuram Rajan, had pointed to three possible reasons for this simultaneous rise in input cost and output prices: first, MSP pushes the input costs alongside; second, increased MSP for a limited crops leads to suboptimal production of the others, thereby hiking the latter’s costs; third, the nominal rural wages have increased sharply in the past years due to increased MSP, availability of credit, and movement of labour to other sectors, resulting in higher demand of agricultural labour, among other things. The conclusion is simple: increase in MSP can lead to hike in food prices and, in turn, result in CPI inflation.

This conclusion has multiple devastating implications for farmers. First, though the nominal income of farmers would enhance to some level, the real income of the farmers would be in deficit. Second, the agricultural sector being the hive of unorganised employment, the job security among the tillers would further go down. Third, the fiscal deficit on the government would escalate, indicating higher liabilities.

Thus, the step taken by the government to balance the needs of the people engaged in the agricultural sector with the macroeconomic condition of the society should be appreciated for being beneficial to the farmers as well as the overall economy. In this age of highly volatile and inter-related markets, predictions become a risky affair, especially when the Indian economy is facing a depreciating rupee. In these circumstances, no one would prefer a weak rupee and inflated prices at the same time.

One might disagree by proposing that the present upsurge in the CPI inflation is owing to the increased crude oil prices in the global market and that food prices have less to do with it. I have two responses for this: witnessing the existing turmoil in global politics, it appears less probable that the crude oil prices would ease down in the near future; and, given the fact that the RBI has started regulating the monetary policy based on CPI inflation, any further rise may result in harsher interest rates. Already the RBI has declared an increase in the interest rates by 25 basis points in the August meeting of the Monetary Policy Committee, in view of the current CPI inflation. Therefore, I consider the government’s latest decision regarding the level of MSP hike a prudent one, and appreciate that such a decision has been taken during a period of high inflation.

Anmol Jain


Updated On : 17th Aug, 2018


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