By Arushi Sharma
The Indian government’s decision to fix minimum support price (MSP) at 1.5 times the production cost is unlikely to have a huge impact on inflation, according to the State Bank of India (SBI) research report Ecowrap. The report, authored by SBI’s Chief Economic Advisor Dr Soumya Ghosh, further states that the publicly perceived figure for the implementation of the proposed scheme may be exaggerated.
Claims made in the report
The report suggests that, contrary to the current market perception, the proposed scheme may not balloon public expenditure to as much as ?80,000 crore; it may, in fact, be less than one-fourth of this estimated cost. At present, the government decides the MSP of 23 commodities in consultation with the Commission for Agricultural Costs and Prices (CACP). It also procures wheat and paddy from the farmers in order to supply food grains at subsidised rates under the Food Law. Paddy, bajra, wheat, and maize comprised more than 80 percent of India’s total food grain production and covered 75 percent of total cultivation area in the previous fiscal year.
During the Budget speech on 1st February 2018, Finance Minister Arun Jaitley had announced that the actual input cost plus the unpaid value of family labour will be taken into account while fixing the MSP for notified Kharif crops. “For a majority of the notified Rabi crops, MSP at 1.5 times over production cost has been decided. Now, the government has decided to make the MSP for all notified crops in the coming Kharif season at least 1.5 times of input cost. It will help in doubling farmers’ income,” he had said.
SBI has used findings from a survey to point out that the overall burden will be much less if the government procures the major crops and directly transfers the MSP-based deficiency payment to the farmers. Allaying the growing concerns regarding the MSP hike announced by the Centre, the report emphasises that the institutional mechanism of income compensation is a much better route in the current scenario as compared to loan waivers.
Implications of loan waivers
The State government of Punjab, Uttar Pradesh, and Maharashtra have announced farm debt relief packages amounting to around Rs 77000 crore, which is about 0.5 percent of India’s 2016-17 GDP. As India gears up for the 2019 general elections, more of such large-scale loan waivers are on the cards. Considering that the promise of debt waivers has helped the country’s political class come to power in the past, it becomes all the more likely that this option will be widely adopted again.
A closer analysis reveals the faults of this perpetual loan waiver culture. Not only will these states struggle to achieve the 3 percent budgeted deficit, such policies may also impair the quality of public spending by states. This may ultimately prove to be counter-productive in helping the cause of distressed farmers in the long run.
Enabling a prolific agri-economy
Currently, the defaults are borne by the Centre, being compulsorily insured by the Agricultural Insurance Company of India; whereas, the states bear the cost of the loan waivers. An op-ed in Livemint mentioned that a more collaborative approach may be required for the removal of high loans in the agri-economy. Referring to the very essence of cooperative federalism, it suggested, “The Centre and states need to work together to evolve a farm loan model which protects both farmers and banks without bringing politics into it.”
As for the MSP scheme, the hike will prove meaningless if the government fails to compensate the farmer over and above the gap between the market price and MSP of a particular crop. The real benefit of the scheme is that it will plug the twin problem of leakages and inactive bank accounts through direct and continuous transfers into farmers’ accounts. Therefore, the SBI report highlights timely implementation of the MSP scheme along with the price compensation support and other innovative schemes for the rural sector have the potential to bring about a transformational change in the country’s rural agri-economy. Additionally, there is a need for effective monitoring and evaluation of the scheme, considering that the challenges of data tweaking and market manipulation still pose a challenge to achieving the desired objectives.
Featured Image Source: Visual Hunt
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