UPA’s reform catch-22: To hike wheat prices or not
After braving political risks to initiate reforms, the UPA government faces a tough test of how far it can go. Zia Haq reports.delhi Updated: Nov 05, 2012 01:19 IST
After braving political risks to initiate reforms, the UPA government faces a tough test of how far it can go.
The cabinet is wondering whether it should avoid hiking prices of wheat for the first time in five years.
Not raising the prices will result in one of the first direct steps to fight India's high food inflation, apart from curbing expenditure. But it can anger millions of farmers, often the biggest voting blocs.
"It's a tough call. We can either be realistic and reformist or just succumb to political temptation for votes," a minister said, requesting anonymity.
The dilemma arose after the Commission on Agricultural Cost and Prices (CACP) recommended a freeze on the minimum support price for wheat.
In India, the state determines commodity prices by offering MSPs. An MSP is the assured price at which government buys food produce from farmers, which also acts as a base market price. Higher MSPs boost farm income and encourage farmers to grow more because they get a guaranteed price.
However, successive raises have strongly raised food inflation. Higher wheat MSP has helped record production, but at the expense of vegetables and pulses, whose shortage has driven food inflation. "Price policies do hamper crop diversification," according to policy analyst GDN's latest briefing unveiled in Colombo last month.
Expectedly, the CACP has recommended a much-needed MSP raise in other crops, such as pulses, and not wheat.
An RBI study has found that a 10% MSP hike raises short-term wholesale inflation by 1 percentage point. "In the near term, this (higher MSP) is bad news for food inflation," according to Sonal Varma, an economist with Nomura Research.
One key reason for MSP hikes is to cover higher cost of production. But Varma said MSPs increases have been way higher than cost of production.
"It is a good idea to bring MSP hikes to deficit crops rather than just staples, such as wheat and rice," said NR Bhanumurthy, an economist with the National Institute of Public Finance and Policy.