Minimum Support Prices and
the Food Crisis

Apr 4th 2002, C.P. Chandrasekhar

The changes in minimum support prices for rabi season crops illustrate the fact that the government is bent on pursuing an infeasible strategy for resolving the ‘food crisis’ it has itself engineered.
The recent announcement of the minimum support prices (MSP) for rabi season wheat, oilseeds, pulses and barley reveal the rather convoluted manner in which the government is attempting to muddle its way out of a ‘food crisis’ of its own making. Going against the recommendations of the Commission for Agricultural Costs and Prices (CACP), the Food Ministry and the Finance Ministry, which had argued for a freeze in the support price for wheat, the Cabinet has increased the MSP for wheat by a small but significant Rs. 10 per quintal to Rs. 620 per quintal. It has however accepted the CACP recommendations to hike the MSP for oilseeds (rapeseed/mustard and safflower), gram and masur by a substantial Rs. 100 per quintal to Rs. 1300, Rs. 1200 and Rs. 1300 respectively, while keeping the MSP for barley at last year’s level of Rs. 500 a quintal.
These changes have to be assessed in terms of their implications for the resolution of the peculiar ‘food crisis’ confronting the government. This takes the form of the accumulation of huge food stocks in the hands of the Food Corporation of India (FCI) even when poverty, endemic hunger and periodic reports of starvation deaths persist. In the case of wheat, the new marketing season is expected to begin with stocks of 25 million tonnes, as compared with the minimum required buffer stock at this time of year of 4 million tonnes. Such large stocks in both wheat and rice have proved wrong and aborted the government’s policy of curtailing food subsidies by raising the issue prices of food distributed through the public distribution system. Rising MSPs that have ensured larger procurement and rising issue prices that have reduced offtake from the PDS, have together contributed to the burgeoning of stocks held by the FCI. Since this increases the bill incurred by the FCI in the form of carrying costs, the food subsidy has in fact increased, though it currently finances meaningless stock accumulation rather than serving as a form of support to the poor
The congruence of opinion across the Food and Finance Ministries and the CACP, regarding the need to freeze the MSP for wheat, comes as a response to this crisis. Inasmuch as the freeze may help moderate the level of sale by farmers to the procuring agencies, it is seen as one of the many means required to bring down the embarrassing level of food stocks. However, this superficial congruence conceals the fact that the demand for an MSP freeze emanates from analysts with two different perspectives. There are those who still believe that the provision of a cost-plus ‘remunerative’ floor to farmers is necessary to encourage productivity increases and growth in the agricultural sector. In normal circumstances, they would have supported an increase in MSP since, the low average rate of wholesale price inflation notwithstanding, no one can deny that, in a period when fertiliser subsidies are being phased out and power tariffs are being raised, agricultural costs would have risen. If yet they support the freeze, this is because in their view, the government’s practice of succumbing to pressure from the farm lobby and providing a ‘bonus’ over and above the floor price recommended by the CACP has taken wheat and rice prices to unwarrantedly high levels in recent years. The freeze is seen as an effort to rollback the MSP to warranted levels, which would, hopefully, reduce procurement.
There are, however, two problems with this argument that seeks to deal with the problem of foodstocks by acting on the supply of food to the procurement agencies. To start with, it leaves unresolved the question as to how the existing high level of stocks at the start of the procurement season can be reduced. But even if the problem created by pre-existing stocks is ignored, the argument misses out on the possibility that any cost-plus floor in the form of an MSP could result in procurement levels that keep stocks high, given the current regime for disposing of those stocks.

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