Rahul 2.0 needs some basic lessons in economics

Apr 23, 2015

- By Vivek Kaul

Vivek Kaul
Rahul Gandhi recently came back to India from his foreign sojourn of nearly two months. And in his new avatar, Rahul is angry. One of the things he is angry about is the fact that the Narerndra Modi government after coming to power decided to go slow on increasing the minimum support price of wheat and rice. The MSP is the price at which the government buys rice and wheat from the farmers, through the Food Corporation of India(FCI) and other state government agencies.

Rahul told a farmers' rally in New Delhi on Sunday: "We increased the MSP of wheat from Rs 540 to Rs 1400...The MSP has not changed, no benefit to farmers."

Between 2005-2006 and 2013-2014, the MSP of wheat was increased at an average rate of 14% per year. The Congress led United Progressive Alliance(UPA) was in power throughout this period. In comparison, between 1999-2000 and 2005-2006, the price had gone up by 4% per year.

The decision to raise MSP did not have any method behind it. It was totally random. A report released by the Comptroller and Auditor General in May 2013 pointed out that "No specific norm was followed for fixing of the Minimum Support Price (MSP) over the cost of production. Resultantly, it was observed the margin of MSP fixed over the cost of production varied between 29 per cent and 66 per cent in case of wheat, and 14 per cent and 50 per cent in case of paddy during the period 2006-2007 to 2011-2012."

--- Advertisement ---
A Little Thought Can Take Your Small Caps A Long Way...

Small caps can be difficult to decode if you don't spend time studying them... and that is not an easy thing to do for regular investors.

But for the past 7 years, we at Equitymaster have been researching small caps...

And through our research reports, our subscribers got to know about some really exciting small caps that gave them good returns over a period of time.

Yes! Returns like months 250% in 2 years and 1 month, 139% in 7 months, 288% in 2 years and 5 months have been achieved by our subscribers just by going through and giving a little thought to those reports.

They have benefited and so can you...

Click here to see how just 10% of your portfolio could brighten your returns...


Nevertheless, political decisions do not follow economic logic. But the question is did this decision to constantly keep increasing the MSP benefit the people of India at large. The answer is no. It was the major reason behind the high inflation in general and food inflation in particular, that was seen between 2008 and 2014. 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."

Food inflation hurts the poor the most. Half of the expenditure of an average Indian family is on food. In case of the poor it is 60% (NSSO 2011). What Rahul and the Congress party need to understand is that everyone associated with agriculture does not own land. As per the draft national land reforms policy which was released in July 2013, nearly 31% of all households in India were supposed to be landless. The NSSO defines landlessness as a situation where the area of the land owned is less than 0.002 hectares.

Any price rise, particularly a rise in food prices which is what an increase in MSP leads to, hurts this section of the population the most. Is Rahul not worried about them? They may not be farmers who own land, but they also farm land in this country.

Also, Rahul needs to realize that only a small section of the farmers have a marketable surplus, which they are able to sell to the government. This is primarily because the average holding size of land has come down over the decades. The State of the Indian Agricultural Report for 2012-2013 points out that: "As per Agriculture Census 2010-11, small and marginal holdings of less than 2 hectare account for 85 per cent of the total operational holdings and 44 per cent of the total operated area. The average size of holdings for all operational classes (small & marginal, medium and large) have declined over the years and for all classes put together it has come down to 1.16 hectare in 2010-11 from 2.82 hectare in 1970-71."

This means that only a small section of the farmers make money only from agriculture. Only 17% of farmers survive on income totally from agriculture. The rest do other things as well to make money. And given this they are hurt by the food inflation because of a rapid increase in MSP.

The Congress led UPA government also increased the MSP of rice at a very rapid rate. In 2005-2006, the MSP for common paddy(rice) was Rs 570 per quintal. By 2013-2014 this had shot up to Rs 1310 per quintal, an increase in price of around 11% per year. In comparison, between 1998-1999 and 2005-2006, the MSP of rice had increased at the rate of 3.8% per year.

This rapid increase in MSP led to a huge amount of food grains landing up with the government. The FCI did not have enough space to store all this grain. "Between 2005 and 2013, close to 1.94 lakh tonnes of food grain were wasted in India, as per FCI's own admission in the Parliament," a Crisil Research report points out. Rice formed 84% of the total damage.

While rice and wheat rotting in government godowns, there wasn't enough of it going around in the open market. The CAG report referred to earlier points out that in 2006-2007, 63.3 million tonnes of rice landed in the open market. By 2011-2012, this had fallen by a huge 23.6% to 48.3 million tonnes. The same is true about about wheat as well, though the drop is not as pronounced as it is in the case of rice. In 2006-2007, the total amount of wheat in the open market stood at 62.1 million tonnes. By 2011-2012, this had dropped to 61.4 million tonnes.

Also, with MSPs being increased every year at a rapid rate, "the cropping pattern," the Crisil report points out, was also "biased towards food grains like rice and wheat," and this led to their "excessive production".

This is what the Congress led UPA's policy of constantly increasing MSPs, actually did.

To conclude, as the old English saying goes, "the proof of the pudding is in eating it". If the policy of the Congress led UPA government of increasing MSPs at a rapid rate was so good, why did the Congress party end up with only 44 seats in the 2014 Lok Sabha elections? Maybe Rahul Gandhi has an answer for that.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "Rahul 2.0 needs some basic lessons in economics". Click here!

14 Responses to "Rahul 2.0 needs some basic lessons in economics"

D Ghosh

May 4, 2015

Why Rahul Gandhi alone? Even our PM, FM, DM, et all need basic lessons in Economics. First of all they need to learn the 6 stages of economy and how it evolves. How one stage supports the other. By increasing MSP does increase a farmer's purchasing power, but that is short lived. All that goes in buying essentials at higher price. Farmer committing suicide is an indicator to the failure of their policies. Politicians should take lessons on how to handle problems at the root level.


murtuza munim

Apr 30, 2015

The article by Mr Kaul seems more like a paid article by ruling party. The author has tried to belittle the problems of the agricultural economy which supports a vast majority of population in our country. The irony of the article is that the author has tried to malign a certain person but he had to use that person name in the article heading to interest the reader.


Dr.Gautam Haldipur

Apr 28, 2015

The article, prima facie makes very interesting reading, more so because it exposes the chinks in the armour of the rejuvenated "RaGa". If whatever he is shouting now from the roof top is to score political brownie points, it is a different issue. But it is quite evident from political results these days that gone are the days when people could be fooled all the time.The earlier, "RaGa" & his advisors understand this, the better it would be for the "Heir Apparent" of the Congress Party. There is not a single issue raised by these guys that could significantly change the future of the country. The pity is that they are "reactive" & not "proactive" & oppose for the sake of opposing, trying to misguide or misinterpret things.
Vivek has rightly pointed out the issue of MSP & I believe he has hit the Bulls eye.They got into a "Chakravyuha" of which they did not know the exit door!Even more, when Narasimha Rao & Manmohan Singh had the reins of the economy in their hands, a lot of talk of "Agricultural Reform" was doing the rounds & unfortunately nothing has come off till date. Anything done is only skimming the surface & leaving a huge populace to the vagaries of nature & political jingoism. A feeble attempt was made during the Vajpayee regime with introduction of the "Crop Insurance" Scheme, which by itself has shortcomings & needs a lot of change. The need of the hour is "Complete Agricultural Reform" in a time bound manner. A single percentage point growth in the agrarian economy makes a huge difference to the GDP & in turn on all the attendant figures, changing things for sustainable good all around.It just needs a little "Out of the Box thinking". Don't we have it after so many years? What a shame!Let's resolve "TO DO IT".



Apr 25, 2015

I agree to what Mr. Katari has told. The increase in MSP was more in tandem with the rise in Food Price, globally. Moreover the MSP received and how it benefits the farmer varies from state to state depending on the cost of production also. Prof Ashok Gulati has spoken about it a lot and how some Eastern states like UP, Bihar do not receive the full MSP for their produce. Hope Mr. Kaul has not written this article to bash Rahul Gandhi. Then it is unaccepteable from person like Mr. Kaul.


Sarat Palat

Apr 24, 2015

Who is Rahul Gandhi ? What he knows about India, Indians and economics ? He is a scrap wiped off in the last election. The media should not give any sort of attention to what he says.


Dharmendra Kapur

Apr 24, 2015

Rumour has it or is it in one of the papers that Rahul Gandhi was in Myanmar doing meditation for 56 days. What a privilege. That should have made him more thoughtful, compassionate etc. etc. rather than aggressive !!. Are we missing something? Where was he and what was he learning?



Apr 24, 2015

The view on MSP has it merits and has been oft repeated in various media.
What I think we need to do - is to set the agenda for the political class rather than respond to the statements by them.
What I mean is such articles should focus on what's needed to enable the diversion to the right crops, what should be done to enable the productivity in our crops...


Sanjay Vaidya

Apr 23, 2015

I fully agree with your views expressed. Will this article reach Rahul Gandhi so that it can have a real effect. In fact, it should reach all the important politicians. Let them know that their so called popular decisions can affect the entire country adversely.

Like (1)


Apr 23, 2015

Unless my math is totally off, the international price of white rice in 2006 was $ 326 per metric tonne, spiked to 986 in 2007, down to 590 in 2011 and is now at about $400. This means, in quintal terms, it has moved from Rs2400 to Rs5900 and now back at Rs2400 approximately. According to everything I see the producer of staples like rice and wheat always get the rough end with fruit, vegetables and lentils for example following a demand supply trend and getting usurious prices at times. When we pay international prices for everything we import and, like petrol, add huge taxes on it, why should not rice get somewhere close to its market worth ? With some 80 percent of our population living on farms what would we do if they moved en masse to the cities ? They have to be paid well, and everyone who tries to do so is being sensible and practical. The congress lost mainly because they failed completely to tell us what they had done, and instead allowed the corruption label to wrap around them like a shroud. It was a miserable communication effort.

Like (2)


Apr 23, 2015

The problem with Rahul Gandhi is neither he understands the things on his own nor he is able to have some able and knowledgeable advisors to make him understand. He talks out of his head extempore and holds focus light on his ignorance. We need able and effective opposition to control the present government in a constructive manner. But we find motely crowd as opposition who oppose everything that is presented by the Government. As such no visible improvement is seen except increasing tax burden on individuals. Once the oil prices start increasing, we will be back to square one in no time.

Like (1)
Equitymaster requests your view! Post a comment on "Rahul 2.0 needs some basic lessons in economics". Click here!