Mint Explainer: A modest, not very populist hike in MSP

How much increase in MSP?

To provide food-security schemes and stabilize market prices, the central government buys some crops directly from farmers at MSP. For the kharif season, whose sowing begins with the onset of monsoon in June, the government announced an average hike of 7% year-on-year for a basket of 14 crops, including cereals, pulses, oilseeds and cotton. The increase was 5.8% last year and 3.5% the year before. However, the current increase is less than that of the last general election year, 2018. That year the MSP of paddy, the main kharif crop, was increased by 13% compared to only 7% this year.

What factors led to the increase?

The MSP policy aims at ensuring adequate public stock. Due to high food grain inflation, stock-building of crops like paddy is important to limit further rise in prices. This is important because 2023 is an El Niño year and rains could be deficient, leading to a drop in production. The increase in MSP for farmers is due to rising cost of production and not just a populist move. Official data shows that input cost is 7.7% higher in FY24 as compared to the previous year.

Is paddy the only crop that is bought at MSP?

In the kharif season, the government usually buys over 40% of the paddy produced, which is milled into rice, a staple across India. It also buys a small amount of pulses – less than a tenth of the total production – and some cotton. The procurement of oilseeds is less. Overall, the procurement bias is in favor of states like Punjab, Haryana and Telangana for rice and Maharashtra and Karnataka for cotton and pulses.

Is the increase in MSP inflation?

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 also play an important role. For example, India last year imposed export restrictions on wheat and rice after production was hit, and reduced import duties on cooking oil to keep retail prices in check. For some time now, erratic weather has spoiled the game: deficient rains affected rice and pulses last year, and a heat wave and unseasonal rains damaged the winter crop of wheat in 2022 and 2023, respectively.

Which factors will dominate in 2023?

El Niño phenomena, associated with the warming of equatorial Pacific Ocean waters, often have a negative impact on the June to September monsoon season. Nine out of 15 El Niño years between 1951 and 2022 resulted in below-normal rainfall. The government’s Meteorological Department has predicted that rainfall will be in the lower part of the normal range (96-104% of the 50-year average), but private forecaster Skymet expects rainfall to be below normal. A large deficit and uneven distribution could impact food production and raise inflation risks. So far, a deficit of 61% has been recorded in the first 10 days (June 1-10) of the monsoon season.

Updated: June 12, 2023, 01:18 PM IST