Mint Explainer: A modest, not-too-populist hike in MSP

How significant is the MSP increase?

The union government buys some crops directly from farmers at MSP to provide for food-security schemes and to stabilise market prices. For the kharif season, planting for which begins in June with the onset of monsoon, the government announced an average hike of 7% year-on-year for a basket of 14 crops, including cereals, pulses, oilseeds and cotton. The hikes amounted to 5.8% last year, and 3.5% the year before that. However, the current increase is lower than in the previous pre-general election year, 2018. That year the MSP of paddy, the main kharif crop, was raised by 13% compared to just 7% this year.

Which factors drove the hike?

The goal of MSP policy is to ensure adequate public stocks. Due to high cereal inflation, building stocks of crops such as paddy is crucial to limit any further surge in prices. This is crucial as 2023 is an El Nino year and rainfall could turn out to be deficient, leading to a drop in output. For farmers the increase in MSP is to account for rising cost of production, and not just a populist move. Official data shows that input costs are up 7.7% in FY24 compared to last year.

Is paddy the only crop purchased at MSP?

In the kharif season, the government usually buys over 40% of the paddy produced, which is milled to make rice, a staple across India. It also buys smaller quantities of pulses — less than a tenth of total output — and some cotton. Oilseeds are rarely procured. Overall, procurement is skewed in favour of states like Punjab, Haryana and Telangana for rice, and Maharashtra and Karnataka for cotton and pulses.

Is the MSP hike inflationary?

MSP is not the only factor that determines retail food prices. Other variables are domestic production, public stocks, input costs and global prices — especially for oilseeds, where India is heavily dependent on imports. Trade policies play a crucial role, too. For instance, India imposed export restrictions on wheat and rice last year after production was hit, and lowered import duties on cooking oils to keep retail prices in check. Of late, erratic weather has played spoilsport: deficit rains affected rice and pulses last year, and a heatwave and untimely rains damaged the winter crop of wheat in 2022 and 2023, respectively.

Which factors will likely dominate in 2023?

The El Nino phenomenon, associated with the warming of equatorial Pacific Ocean waters, often negatively impacts the June-to-September monsoon season. Of the 15 El Nino years between 1951 and 2022, nine saw less-than-normal rains. The government’s meteorological department has predicted rains will be on the lower side of the normal range (96-104% of the 50-year average) but private forecaster Skymet expects rains to be below normal. A large deficit and skewed distribution could affect food production and raise inflation risks. So far, a deficit of 61% has been recorded in the first 10 days (1-10 June) of the monsoon season.

Updated: 12 Jun 2023, 01:18 PM IST