MSP hike: Too much or too little? - Views on News from Equitymaster

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MSP hike: Too much or too little?

Aug 21, 2009

Although improved rainfall in some regions over the past few days has brought some relief to the parched land, key crops remain endangered. The food price index has climbed by 10.5% in the year through August 8th and the number of drought declared districts have gone up to 246. In its latest move to provide relief from the drought, the government has hiked the purchase price (also known as the minimum support price or MSP) of rice (paddy) and lentils. Moreover, the government has given states permission to increase borrowing limits by around Rs 200 bn this year to meet additional expenditure and stimulate demand.

On Thursday, the government hiked the MSP of rice by Rs 100 per quintal. This is despite its earlier stand of freezing paddy prices. The price of pulses was increased by Rs 240 per quintal. The general view is that the hike it too less. In the year 2008-09, paddy support price was hiked by 31.8% and compared to that the hike this year is of just around 11.8%.

The government estimates that the paddy crop will be 'just marginally' lower this year should be taken with a pinch of salt. The produce this year has come at a heavy increase in input costs apart from the adverse impact on the groundwater levels. The farmers this year had to resort to heavy pumping to water their crops. According to reports, in some parts of the country, the farmers used 30 litres of diesel per acre against the usual consumption of 10 litres of diesel on paddy transplantation.

However, we have to consider the fact that the government is walking on a double edged sword. While it has to help support farmers, it cannot place the entire burden on the common man who has to ultimately bear the burden of rising food prices (on the back of higher MSP). Besides this the government has to procure sufficient grains so that it maintains a buffer stock and has enough grains to supply through the public distribution system (or the ration shops).

We must not forget that in a free economy the market sets the price. Hence, at the end of the day, the government can hardly control what the farmer will get for his produce and what the common man will pay for his purchase.

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