Hiking MSPs can set off inflation spiral again
With the elections coming closer, the big inflation fear is the government will be tempted to go for a minimum support price-hiking spree, setting off another vicious price-rise spiral, especially in the foodgrain segment. Last week, the government raised the minimum support price (MSP) of several rabi crops by 7-20%—prices of mustard rose 20%. No decision was taken on wheat prices though the government press release ominously said there would be further consultation on this—this could be interpreted as good news or bad news depending upon whether there is a hike or not. While merely plotting MSPs and retail prices on a piece of paper shows a clear relationship between the two, research done by economist Surjit Bhalla using data for 1978 to 2011 shows there is a 3% hike in the consumer price index for each 10% hike in MSPs.
Supporters of hiking MSPs argue two things. One, they say, farmers need to be compensated for a hike in costs of inputs—rural wages, for instance, have risen 20% annually for the past few years. Two, the inflation in crops which have MSPs are lower than those that don’t have MSPs. The farmers’ need for compensation is justified, but cost-plus regimes take away the need for productivity hikes. As for the MSP-crops having lower inflation, the argument is a bit more subtle. A hike in MSPs, for wheat for instance, means the land is that much more valuable—so even potatoes grown on it will command a higher price. But with the UPA having more than doubled MSPs in its 8 years in office, it clearly doesn’t buy this logic—per quintal MSPs for paddy rose from Rs 550 in FY04 to R1,250 in FY13, wheat from Rs 630 to R1,285, maize from R505 to R1,175, and so on. By contrast, the NDA raised MSPs by just around 10%.
Whether the UPA chooses to hike MSPs in a big way, of course, will depend on whether it thinks it came to power again due to its pro-farmers policies—apart from the MSP hikes, UPA doled out a Rs 70,000 debt relief for farmers and also brought in MGNREGA. The flip side of this, of course, is that the finance minister has been warning Cabinet colleagues that if they didn’t start getting their act together, India could find itself getting downgraded by credit rating agencies. Presumably this definition of acting responsibly also extends to hiking MSPs at will.