Cabinet led by Narendra Modi to decide on MSP hike today

New Delhi: Amid the growing discontent with the NDA government’s policies among farmers in an election year, prime minister Narendra Modi here on Tuesday took stock of the situation and discussed financial implications of the proposed raise in MSP with the Niti Aayog and the agriculture ministry.

The meeting, chaired by prime minister Narendra Modi, has come ahead of the Union Cabinet meeting on Wednesday which is likely to approve the minimum support price for kharif crops and raise paddy MSP by Rs 200 to Rs 1,750 per quintal to honour the announcement in the budget that the government would insure that farmers receive at least 1.5 times of the production cost of their produce.

The meeting took up the financial implication of the proposed procurement mechanism of allowing farmers 1.5 times higher price than MSP on 23 crops. According to sources, senior officials of Niti Aayog made a presentation before the prime minister.

While neither the government nor the Niti Aayog has given any estimate of the size of this extravaganza, experts estimate that it could be about Rs 1.15-1.45 lakh crore per year.

According to sources, the finance ministry is confident that the new measure would not lead to fiscal slippage and higher inflation. The outlay on MSP would not widen the fiscal deficit as the government is confident of receiving around Rs 13 lakh crore GST revenue this  financial year.

In a response to query from Financial Chronicle on the impact of the move on the economy, Pritam Patnaik, business head, Reliance Commodities, said the total cost to the government will be a function of market price for the crop. Quoting a study by the Indian Council for Research on International Economic Relations (Icrier), he said the range will be between Rs 5,50,000 crore and Rs 1.16 lakh crore, assuming the market price of crops was lower than MSP by 10-20 per cent.

As per the Niti Aayog, Patnaik said the proposed increase in MSP will boost farmer’s income by 24 per cent. Whether the increased MSP would actually translates to higher income in the hands of farmers is to be seen, primarily because of the debate on the right cost formula as proposed by the government or the C2 formula as demanded by the farmer outfits, he added.

However, the economy is expected to have inflationary impact due to the move of the government guaranteeing an 1.5 times MSP, which would be crop-specific and for a specific period.

“The current MSP in majority of the commodities are higher than the A2+FL cost, thus eliminating any inflationary impact in them, while in others we could witness price rise. The government can address any sharp rise in a particular commodity prices by increasing supply domestically or via imports, thus, blunting the impact of MSP increase on the overall economy,” he said.

Normally, MSP is announced just before the start of the sowing season to help farmers choose the crop they want to sow. As FCI procures only wheat and rice for distribution through the public distribution system (PDS), the government wants to put in place a new mechanism to ensure that the hike in MSP reaches to farmers in other crops as well.

According to the Aayog’s proposal, MAS will be implemented by states governments, which will enter the market depending on the local conditions and procure through their own state agencies or any other private agency authorised by states. States will be responsible for procurement and liquidation of the procured commodity. The Centre will compensate the operational loss.

On the other hand, PDPS has been designed similar to the Bhavantar Bhugtan Yojana launched by the Madhya Pradesh government. Under this scheme, if the sale price is below the model price, then the farmers would be compensated to the difference between MSP and actual price, subject to certain conditions and ceiling.