Crop shortages pushed inflation following MSP hikes

Context

RBI’s Monetary Policy Committee (MPC) will definitely consider the inflationary impact of about 5%–11% increase in the minimum support price (MSP) for farm produce in its bi-monthly policy.

About the Food inflation and price rises:

• There is a 7% increase in paddy MSP could lead to higher prices if the crop is not higher than last year’s output.
• Procurement takes place for rice, whose inflation is already high at 11%.
• While procurement of cereals was primarily in terms of wheat and rice, the procurement of pulses was not much.

What is Minimum Support Price (MSP)?

• The MSP is the rate at which the government purchases crops from farmers, and is based on a calculation of at least one-and-a-half times the cost of production incurred by the farmers.
• MSP isa “minimum price” for any crop that the government considers as remunerative for farmers and hence deserving of “support”.

• Crops under MSP:
  • The Commission for Agricultural Costs & Prices (CACP) recommends MSPs for 22 mandated crops and fair and remunerative price (FRP)for sugarcane.
    • CACP is an attached office of the Ministry of Agriculture and Farmers Welfare.
  • The mandated crops include 14 crops of the kharif season, 6 rabi cropsand 2 other commercial crops.
  • In addition, the MSPs of toria and de-husked coconut are fixed on the basis of the MSPs of rapeseed/mustard and copra, respectively.

How MSP can aggravate Inflation?

• Sharp and frequent increases in MSP can feed inflation too.
• It is believed that it was MSP increases on paddy and wheat that fuelled high food inflation in the years to 2013.
• Government procurement at MSP is benefiting the large traders than farmers.
• Small farmers typically do not have enough marketable surpluses.

According to recent research, farmers may typically get as little as 25% of the price that consumers finally pay.

• Their crop is usually sold to traders at low post-harvest prices in the village itself or the nearest ‘mandi’.
• The input costs have been rising faster than sale prices, squeezing the meagre income of the small farmers and driving them into debt.
• MSP is attractive towards wheat and rice which is produced by large farmers. Small farmers who mostly dependent on vegetables, pulses, coarse grains are at disadvantage.
• The payments are delayed when the farmers are in immediate need of cash.
• In some states, the awareness about the time of their announcement is very low.
• The reason for not selling at MSP was that the purchase centres were located at distance which required high transportation costs.

Problems need to be addressed:

• Low Yield: To use rights manures and fertilisers to increase the yield and providing subsidies.
• Access to Quality seeds: Quality seeds are primary for higher yield.
• Irrigation: Till now India’s one-third of the land remains less or no irrigated.
• Low profit margins: Farmers are facing increase in cost of production, which depends upon several factors namely, cost of fertilisers, transportation and MSP.
• Lack of mechanisation: Due to less affordability, mechanisation is less inclusive in India.

Lack of awareness: Farmers must be educated regarding increasing production.