Daily Financial News Analysis – 8th Dec’20 – Free PDF Download


Mandatory Minimum Support Price

  • New slogan – a law to ensure Minimum Support Price (MSP)
  • The farmers have a right to demand what they think is good for them, but there are dangers ahead.
  • A mandated support price implies that no private trader can buy below such price.
  • Continued financial support to farmers is essential
  • Food security
  • Highly input-intensive agriculture supported by public procurement continues to be our strategy for food security.
  • Over time, however, demand has changed;
    1. the climate has become variable
    2. the aspirations of farmers have risen
  • It is time to focus on farmers’ incomes, sustainability and nutrition.
  • Changes in markets and production are reflected in the composition of the gross value of output in agriculture and allied sectors.
  • The ‘MSP crops’ (mainly, cereals, oilseeds, pulses and fibres) add up to only 25% of the value (2018-19).
  • Farmers who produce the other 75% (mostly perishables) are dependent on the market and its price fluctuations.
  • Currently, 23 crops are under the MSP regime, the most seminal being paddy and wheat.
  • Till a decade ago, the question before the policymakers was ‘will the MSP give us enough grains to meet the PDS requirement?’
  • There were prolonged discussions (mostly during 2006-08) about procurement price being kept higher than the MSP.
  • Things changed later, mainly on account of increased production and 3 important decisions
    • To keep a strategic reserve of 5-6 million tonnes in addition to buffer stocks, a result of the serious shortage of public stocks in 2006 followed by a global food shortage in 2008
    • The enactment of the National Food Security Act guaranteeing highly subsidised food to almost two-thirds of the population, resulting in increased pressures on procurement
    • The decision to calculate the MSP at cost plus 50% (2018)
  • The procurement of rice and wheat went up to about 90 million tonnes (51mt rice and 39 mt wheat) this year, which is about 50% more than the requirement (a surplus of about 25-30 mt).
  • Procurement, as a percentage of production, is rising while production is also rising.
  • Apart from the huge logistical challenges, food subsidy will balloon to unsustainable levels.
  • What will happen to the private market and food inflation when the government is forced to sit on such huge stocks is anyone’s guess.
  • Add to this the calls to expand the basket of 23 commodities.
  • Add to this the scenario of a mandated MSP.
  • The private sector (and that includes all small traders) will have no option but to stay out of the market or cheat on the price.
  • The state agencies will end up buying almost everything and will need to resort to ‘Open Market Sales’ to meet consumer demand.
  • Traders can sit back, buy from FCI, and make a neat profit, while the government loses huge sums of money.
    • Announce a pre-determined price and buy substantial quantities of ethanol through PSU oil companies
    • Announce a ‘nudged and incentivised’ export of 6 mt of sugar with a subsidy of about Rs 10/kg of sugar (Rs 6,000 crore)
    • Fix a minimum ex-factory sale price of Rs 31/kg of sugar, imposing an involuntary burden on the consumer
  • This subsidy regime is subject to a challenge in the WTO, and if non-compatible, we will have serious problems in our hands.
  • This year also, we are staring at a large surplus.
  • Clearly, this is not the way forward!
  • Open-ended MSP itself is a big challenge at present.
  • If it is decided for any reason to ‘mandate’ MSP, we are staring at disappearing export markets, a disrupted domestic supply chain, unmanageable surpluses and an unaffordable subsidy burden.




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