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Minimum Support Prices For Kharif Season Throw Up Tough Choices

Higher MSPs will compensate farmers for increased input costs. But they could also feed into inflation.

<div class="paragraphs"><p>Vijay Nazirkar, a farmer, cuts partially destroyed sugarcane to be used as fodder for his cattle at a village in Pune, India, on&nbsp; September 15, 2015. (Photo: Reuters/Danish Siddiqui)</p></div>
Vijay Nazirkar, a farmer, cuts partially destroyed sugarcane to be used as fodder for his cattle at a village in Pune, India, on  September 15, 2015. (Photo: Reuters/Danish Siddiqui)

As the time comes around to announce the minimum support prices for agricultural commodities for the Kharif season, the Indian government will be faced with difficult choices.

Higher input costs may require that support prices be raised more than in previous years to ensure farmers are adequately compensated. But, by doing so, the government risks fanning already high inflation in the Indian economy.

Support prices for the Kharif season are typically announced in early June and cover key commodities like paddy, jawar, bajra and maize along with oil seeds like groundnut, soyabean and sunflower. Lentils such as moong and urad are also covered.

In several of these items, inflation is already running high.

MSPs must rise according to the rise in input costs, said agricultural analyst Devinder Sharma. "Whether food inflation is high or not, it is not the farmer who is at fault and should not pay the price for it," said Sharma.

According to him, the government should consider mid-season revisions in MSPs when there is a sharp rise in input prices.

MSP Hikes: Higher Than Previous Years?

Setting minimum support prices for agricultural commodities has always been a part political and part economic decision in India.

When the United Progressive Alliance was in government, relatively high MSP increases had boosted farm sector prosperity but it had also been blamed for high inflation. In contrast, the National Democratic Alliance government has opted for lower MSP hikes.

In 2018-19, in order to bring more transparency to the fixing of MSPs, the government had proposed a formula which ensured farmers a remuneration of 50% above their cost of production. This formula—A2+FL—covers costs borne by the farmer on items such as seeds, fertilisers, pesticides, hired labour, leased-in land, fuel, irrigation, etc. It also includes the imputed cost of unpaid family labour.

Amid the sharp increase in input costs, MSPs could see a significant increase for the upcoming Kharif season, likely in double digits, Yuvika Singhal, economist at QuantEco Research said.

The increase will definitely be higher than the 3-5% on average in recent years as the Committee for Agricultural Costs and Prices, which recommends the MSP hikes, will not be able to look through the rise in input costs.
Yuvika Singhal, Economist, QuantEco Research

Suvodeep Rakshit, senior economist at Kotak Institutional Equities said that apart from human labour, most other inputs have seen an increase in price.

This could mean that MSPs, for instance, in the case of paddy could rise by 8-12% compared to the usual increase of 3-5%, Rakshit said. Pulses such as tur dal, could see a rise of 10-15% if the MSPs were to fully account for the cost increase, Rakshit said.

"The increase in cost of production for the farmers is inevitable for the upcoming Kharif season keeping in view rising prices for major cost components like pesticides, fertilisers, farm equipment, human labour and irrigation, which altogether contribute to about 55-60% of the cost per hectare," said Pushan Sharma, director at Crisil Research.

Sharma, however, considers a material part of the impact of higher input costs to have been absorbed by the government by way of increased fertiliser subsidies. Still, other inputs like pesticides are expected to have seen prices rise by 5-6%. With rising fuel prices and commodity price hike, the cost of machine labour is also expected to inch up.

Apart from higher input costs, other factors may prompt sharper MSP increases this year.

For instance, with the government trying to incentivise millet production, the rise in MSP for millet crops could be higher in the range of 5-7%, compared to a rise of 2-4% last year, according to Sharma. For paddy, Sharma expects the rise in MSP to be limited, with global and domestic stocks at all-time highs, lowering the possibility of a significant increase in support prices.

The Trade-Off: Rural Incomes Vs Inflation

With inflation rising to 7% in March, rural inflation even higher at 7.66%, and at a time when rural demand is still weak, the decision on minimum support prices will be a difficult one.

Adverse terms of trade have affected farm households and weak rural wages and jobs have impacted non-farm households, said a research note by Kotak Institutional Equities dated March 29, 2022.

Apart from having to compensate for the sharp increase in input costs of agricultural production, the government may also be compelled to significantly increase MSP of various crops in order to support the weak rural economy.
Kotak Institutional Equities

To be sure, prevailing prices of a number of commodities are already higher than the current MSPs, according to monthly data compiled by BQ Prime from Agmarknet—a government portal that collects and analyses data from wholesale markets across the country.

Still, higher MSPs, which can act as a floor price, could spill over into increased market prices.

Higher MSPs may contribute to food inflation, which will increase overall inflation, said the note by Kotak Institutional Equities. "This increase if fully translated into retail rice and rice products prices can increase CPI inflation by 35-55 basis points,” it estimated.

Agricultural economist Siraj Hussain said that inflation, at this juncture, is being driven by global factors. "Whether the government increases MSP or not, inflation will remain high."

"Unless the Commission for Agricultural Costs and Prices goes wild in increase in MSP, there need not be much of an increase in inflation," said economist Abhijit Sen.

In contrast, higher MSPs may actually incentivise production and bring down prices over the medium term, said T Gnanasekar, director, CommTrendz Research.

"Current inflation is a function of current demand and supply. Tightness will remain in the near term but food inflation will ease over time if MSPs announced are higher as they incentivise production," Gnanasekar said.