Citing Inflation And WTO Subsidy Limit, NITI, Commerce Red-Flagged MSP Hike

Relevance: GS 2 - Government policies and interventions for development in various sectors and issues arising out of their design and implementation; GS 3 - Issues related to direct and indirect farm subsidies and minimum support prices

(Source: Indian Express, 08/29/23)

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Why in the news?

• Recently, the Union Cabinet chaired by Prime Minister Narendra Modi approved the increase in MSP ranging from 6 per cent to 10 per cent.
• Central government ministries and departments have raised concerns about the proposal to increase the minimum support price (MSP) for kharif crops in the 2023-24 season. This move has led to discussions regarding inflation, compliance with World Trade Organization (WTO) obligations, labor shortages, and rising wages. Key government entities have conveyed their apprehensions to the Union Ministry of Agriculture and Farmers' Welfare.

What are issues raised by various government departments due to the rise in MSP?

• Inflation: Niti Aayog has expressed reservations about the proposed MSP increase, which ranges from 5.3 percent in the case of urad to more than 10 percent in crops like cotton (long staple), sesamum, and moong.
• It argued that implementing such significant MSP hikes could disrupt efforts to maintain food inflation within the target range of 4-6%, crucial for overall macroeconomic stability.
• Against current approach: NITI Aayog raised concerns about the proposed MSP increase, linking it to the 1.5 times projected cost approach.
• According to Niti Aayog, actual data on some of the cost items shows that the real wages in agriculture are not rising and the increase in price of urea has been absorbed by the Government of India by increasing subsidies, warranting a closer examination of projected costs by CACP and the Ministry and CACP at the state level regarding the effects of both price and non-price recommendations.
• WTO limits: According to the WTO's Agreement on Agriculture, government procurement of crops at administered prices (MSP in India's case) for food security purposes must be notified to the WTO.
• Additionally, product-specific support should not exceed 10% of the crop's production value, and a similar limit applies to non-product-specific price support within the agriculture sector.
• Additional financial burden: The Department of Food and Public Distribution revealed that the increased MSP for paddy in the 2023-24 kharif marketing season (KMS) would result in an additional financial burden of Rs 13,819.80 crore, contributing to a total implication of Rs 2,12,907.60 crore.
• Similarly, the Investment and Price Support division of the Ministry of Agriculture and Farmers’ Welfare, projected a financial implication of Rs 126.99 crore due to the higher MSP of pulses and oilseeds.

What are the arguments for rising MSP?

• The government argued that the increase was in line with the Union Budget 2018-19 announcement of fixing MSP at a level of at least 1.5 times the cost of production, aimed at reasonably fair remuneration for farmers.
• The Agriculture Ministry in response to NITI Aayog, the Ministry stated in a Cabinet note that while recommending MSP, CACP considers the cost of production and overall demand-supply situations of various crops in domestic and world markets.
• Food security: An increase in MSP for Kharif Marketing Season (KMS) 2023-24 is in the range of 5.3% to 10.4% and is essential to ensure remunerative prices for farmers, encouraging them to invest more in production and ensuring food security in the country.
• Higher MSP for crops such as oilseeds, pulses, and Shree Anna aims to promote crop diversification.
• Cost Consideration for MSP Determination: The Agriculture Ministry emphasizes that the "All India weighted average cost of production" is a pivotal factor in setting MSP. The Commission for Agricultural Costs and Prices (CACP) incorporates inputs like labor, fertilizers, seeds, and more through the Composite Input Price Index (CIPI). The estimated production cost rise ranges from 6.13% to 10.52% compared to the previous year.
• Promotion of Agricultural Mechanization: In response to the Department of Expenditure's comments, the Ministry highlights the implementation of the "Sub-mission on Agricultural Mechanization." This scheme aims to expand custom hiring services of agricultural machinery and equipment, fostering farm mechanization and access for small farms. The Rashtriya Krishi Vikas Yojana (RKVY) contributes to this effort.
• Addressing WTO Commitments: The Ministry underscores adhering to World Trade Organization (WTO) commitments. It notes that the aggregate support calculation doesn't account for inflation since 1986, resulting in an understated External Reference Price (ERP) and overstated aggregate support.

Recommendations by CACP

• CACP highlights labor scarcity and increasing wages as major issues in Indian agriculture, advocating for farm mechanization to counter labor shortages.
• The commission commission recommends that collective/group ownership of machinery through self-help groups, cooperatives, and custom hiring centers to enhance access to expensive farming equipment.
• Furthermore, urgent action is needed to resolve supply-side challenges like storage, warehouse infrastructure, and transportation.

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FAQs

MCQ

Question: Which of the following factors/policies were affecting the price of rice in India in the recent past? (UPSC-2020)

(1) Minimum Support Price

(2) Government’s trading

(3) Government’s stockpiling

(4) Consumer subsidies

Select the correct answer using the code given below:

(a) 1, 2 and 4 only

(b) 1, 3 and 4 only

(c) 2 and 3 only

(d) 1, 2, 3 and 4