New Delhi: The twin budget promises of fixing minimum support price (MSP) of crops at cost plus 50% and ensuring MSP to farmers for all crops will lift farm-gate prices by 15% and raise rural incomes, but the transmission of this price rise to wholesale and retail levels will have strong implications for inflation, a NITI Aayog internal document has warned.

“The combined effect of the two budget announcements on farm level prices will be about 15%. Transmission of this increase to wholesale and retail levels will have very strong implications for inflation and consumers," the NITI Aayog document titled Ensuring MSP benefits for farmers said. A copy of the document has been reviewed by Mint.

The document is part of NITI Aayog’s recommendations after it was tasked to suggest a mechanism to ensure that farmers benefit from government’s MSP announcements, following the budget promises last month.

Currently, only farmers growing rice and wheat get the benefit of the floor price, leaving out resource-poor farmers who grow pulses, coarse grains and oilseeds in rain-fed areas.

To tackle the inflation problem arising out of honouring MSP announcements, NITI Aayog also recommended that states reform their agriculture markets by creating efficient supply chains, competitive markets and application of modern logistics and commerce in agriculture marketing.

“To counter the effect of increase in farm level prices, states should adopt the model Agricultural Produce and Livestock Marketing Act (APLM Act proposed by the centre last year)," the document suggested, adding, “Financial support (to states) for MSP (operations) should be linked to satisfactory adoption of major provisions of the model APLM Act. This will also reduce the need for support under MSP."

A government official who did not want to named said that “crashing crop prices and addressing farm distress is more of a worry now than inflation," adding, the government’s thrust on agriculture market reforms will help reduce the price spread between farm-gate and retail prices.

Graphic: Paras Jain/Mint
Graphic: Paras Jain/Mint

While ensuring better MSPs to farmers may stoke inflation, NITI Aayog estimated that farm incomes will rise by an impressive 24%, helping the centre’s goal of doubling farm incomes by 2022.

“The government has to make a choice whether to support farmers by raising crop prices or help consumers by keeping food prices low... and if it has to do both, it has to put the financial resources upfront," said Himanshu, associate professor of economics at Delhi’s Jawaharlal Nehru University. “Even it only wants to aid farmers, it will need more than Rs40,000 crore (as per NITI Aayog estimates) upfront, for which there is no budgetary provision," he added.

Following a meeting with states and the agriculture ministry on 9 March, NITI Aayog said three models are being proposed to the government to ensure MSP to farmers. Under the Market Assurance Scheme (MAS), states will directly procure crops at MSP and pay farmers when prices dip below support prices, a part of which will be compensated by the centre.

Under the Price Deficiency Payment scheme (PDPS) based on a pilot rolled out by Madhya Pradesh last year, farmers will be paid the difference between sale price and MSP—this scheme does not involve any physical procurement of grains.

In the private procurement and stockist scheme (PPSS), the third model proposed by the agriculture ministry, empanelled private traders will procure crops at MSP prompted by incentives like exemption from export restrictions, income tax benefits, credit access, exemption of market fees, and a maximum of 5% commission on the value of procured crops.

According to the NITI Aayog, if some states adopt MAS and others adopt PDPS, the financial implications will be an estimated Rs45,036 crore if average crop prices are lower by 25% than the MSP.

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