The Cabinet Committee on Economic Affairs (CCEA) has decided to increase the minimum support price (MSP) of rice by Rs 50 per quintal or 3.8% to Rs 1360, for this year. The MSP is the price at which the government buys rice from the farmers, through the Food Corporation of India(FCI) and other state government agencies.
The law minister Ravi Shankar Prasad was confident that this decision will not fuel inflation. As he told the media “I do not think rise in MSP is directly linked to inflation. We are taking several measures to control inflation”.
While the increase in MSP of 3.8% is lower than the average increase of 9% per year in the MSP of rice since 2007-2008, Prasad’s statement is wrong on several counts. As economist Surjit Bhalla put it in a November 2013 column in The Indian Express “For each 10 per cent rise in previous years’ procurement prices, there is a predicted 3.3 per cent increase in the current year CPI…When the government raises the MSP, the prices of factors of production involved in the production of MSP products — land and labour — also go up.”
Given this, even a 3.8% increase in the MSP of rice will translate into some inflation. Further, several states like Punjab, Haryana, Uttar Pradesh, Andhra Pradesh and Odisha, levy procurement taxes on the rice and wheat procured by the central government through FCI.
A recent article in The Financial Express estimates that these “purchase levies account for 10-14.5% of the minimum support price (MSP) announced by the Centre on rice and wheat procurement.” Hence, when the MSP of rice goes up, these levies which are a certain percentage of the MSP, also go up. This in turn pushes up the price of rice.
Also, it is worth remembering here that the FCI, directly and through state government affiliates, procures rice and wheat from farmers at the MSP set by the government. It buys all the rice and wheat that farmers bring to it, as long as it meets a certain quality. Farmers have a ready buyer, and one who keeps increasing the price.
This has led to a situation where the government of India has become the biggest hoarder of rice and wheat. A recent report in The Financial Express points out that “the Food Corporation of India (FCI) had rice stock of more than 28.2 million tonnes at the start of the month, which is more than the double the requirement under the strategic reserve norm.” Hence, it is not surprising that the price of rice in May 2014 rose by 12.75% in comparison to May 2013.
Earlier this month the government decided to sell around 5 million tonnes of rice in the open market. As and when this happens this will have some impact on the price of rice. But that effect will be negated with the government buying all the rice that lands up at its door and starts hoarding again in the months to come.
Take the case of last year when the MSP for rice was increased by 4.8% to Rs 1310 per kg. In October-November 2013, the inflation in the price of rice was at around 15%. The only possible explanation for this is the fact that the government bought much more rice than it needed to run its various programmes. Hence, a lesser amount of rice landed up in the open market and thus fuelled inflation.
Given these reasons, Ravi Shankar Prasad is wrong when he says that the decision to increase the MSP of rice will not fuel inflation. Having said that some amount of increase in the MSP of rice is necessary. The farmers also need to be paid more every year, given the high inflationary times that we live in. The only way for the government to ensure that it does not cause inflation is to buy the right amount of rice and wheat that it actually needs to run its various programmes and not more.
The article originally appeared on www.firstbiz.com on June 27, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)