If MSP is raised one year due to scarcity, that level becomes the base for future years and the new MSP formula disconnects food prices from market forces, Dr. Chand told CNBC-TV18 on October 17.
“If because of shortage, the MSP is raised in one year, then that becomes a raise for further rise the next year. And now we have a new formula A2+FLx1.5. I am not criticising it, but that formula, in my opinion, has led to detachment between what would be open market price and what is MSP in most cases, not in all cases,” he explained.
Earlier MSP would be based on the judgment of the authority that farmers must get a certain amount, but now it is based on a formula. “So, we have to rethink the formula in that case,” he suggested.
NITI Aayog’s Agriculture Head’s remarks come a day after the Union Cabinet hiked the MSP for six rabi crops, including wheat, mustard, barley, lentil, gram and safflower.
(MSP is a remunerative price to help farmers with adequate returns for their produce. It protects farmers from sudden dip in prices and it is also conducive in maintaining food security and provides a base for price discovery in the market. This gives financial stability to the agriculture system and encourages better production.)
Dr. Chand, however, clarified that this was his personal view but even when the new model was adopted, he had objected to it and warned about such a situation. “There were people who complained against me to prime ministers but I just was able to visualise that it will create this kind of situation and it is created.”
Could MSP for farmers be driving up your household costs?
Dr. Chand noted that earlier demand and supply in the country, global market and such things would be considered to understand higher or lower margins, however, it is now not in the hands of the Commission for Agricultural Costs and Prices (CACP).
It has now become a more mechanical exercise. “This is a very serious point I am making. If your A2 plus FL multiplied by 1.5 is not close to the open market price, then you will find that the announcement of MSP will keep creating inflation.”
What are the likely solutions?
NITI Aayog’s Agriculture Head cited the example of China, which does need-based procurement, however, India runs the public distribution system (PDS) and also needs buffer stock.
“We procure 50 million tonnes of rice and wheat. Right now, it is open-ended because of MSP. We should move toward the system of Bhavantar Bhutan or Deficiency Price Payment to avoid distortion in market price.”
The NITI Aayog member believes that the consequences of this distortion are going to become heavier in future.
“Now, we are facing inflation only. The second consequence will be when home prices are so high, exports will be affected and India is moving toward a situation where surplus is expected to rise,” he explained.
NITI Aayog’s Agriculture Head asserted that farmers’ incomes need to be raised but there needs to be a new instrument for doing it. “We have to disconnect farmer income from it. We should see that market distortion should be avoided.”
Will food inflation persist? And, the choice between tomatoes and puree
Dr. Chand noted that food inflation was less than 6% last month. All projections show that it will be less than 6% but there is one component on which there is no control — fresh vegetables.
“First of all, you can’t have a buffer stock for vegetables. Secondly, we don’t have trade options for that. Thirdly, the taste and preferences of Indian consumers are so strong for fresh fruit and vegetables that they are not willing to use processed products as a substitute, which is done the world over, says tomato puree kind of things. So these are the reasons and they are highly vulnerable to better-related things.”
He also said that as he’d suggested to RBI the vegetable index is currently entirely based on top few vegetables like tomatoes, onions and potatoes, and that could be enlarged to include other vegetables, maybe season-wise.
“In fact, if you look at data for last year, In July and August, tomato prices had crossed 100 rupees last year also. But this year it happened in late September and early October. It is going out of control.
And it is not that on the ground there is no response as the area under these vegetables is rising. Farmers are responding to high prices of vegetables and though they know there is volatility, but most farmers today are not risk averse, he said.
“Whatever needs to be done from the government side, like there is a committee of ministers, they take cognisance of this every two months. RBI takes cognizance of that and the committee of secretary meets every fortnight to take stock of such things.”
Some effort is made, for instance, at SAFAL outlets, the price will be 40% lower than the open market. “The only solution is active intervention.
Will food inflation come down by December or next quarter?
The Niti Aayog Agriculture head exuded confidence that his assessment is that food inflation would come down.
“Then perhaps the pain of high inflation is short-lived, at least in terms of the headline inflation.”