The government’s policy waffling is clear and unmistakable now. Setting the minimum support price (MSP) for rice for the 2008-09 marketing season is the most recent example. The Commission for Agricultural Costs and Prices (CACP), the body that recommends agricultural commodity prices, has set MSP at Rs1,000 per quintal this year (last year, it was Rs645). The government reduced it to Rs850 as an “ad hoc measure” and referred it to the Prime Minister’s Economic Advisory Council (EAC). After CACP, the cabinet takes the final call.
If the politics behind this decision is poor, the economics is questionable as well.
(Illustration by Malay Karmakar / Mint)
In practical terms, there’s a strong urge to rein in the massive increase in MSP for unpolished rice. Such increases have a cascading effect on the final price of rice sold in retail markets. Every stage, from the lifting of crop from farm gate to polishing by rice millers to storage and movement, adds to costs that add to inflationary pressures.
More importantly, as rice purchases are funded by the Union government, increases in MSP add to the food subsidy burden and, in turn, add to the fiscal deficit.
As far as textbook economics goes, this is a fine step. But in administrative terms and the way foodgrain markets work, it’s not a good idea at all. Unlike wheat, which can be brought to markets almost immediately after the marketing season is over, rice has a different dynamics. It takes time to shell raw rice and this process takes anywhere from four to six months. Then there’s the time taken to transport the rice to consumers in different parts of the country.
Usually, this is not a problem as the Food Corporation of India has buffer stocks to tide over this period. But with grain shortages and galloping demand, marking time has become difficult. This is the time when inflation strikes.
Politically, of course, it’s plain dawdling on the part of the government. There are two aspects to the situation. One, had the decision been taken quickly and firmly, it could have helped quell inflationary expectations. This intent was diluted, if not wiped out, by referring the matter to EAC. Two, it’s likely to cost the United Progressive Alliance dearly. It can adversely affect the alliance in major rice-producing states such as Andhra Pradesh, Punjab and Haryana. With assembly elections in Andhra Pradesh this year and the general election next year, farmers are unlikely to forget this soon.
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