In an attempt to prod farmers to grow more of a commodity that is scarce and painfully pricey, the Modi government offered a larger increase in the minimum support prices (MSP) for pulses in comparison to more modest hikes in most other crops in the summer-sown season.
The MSP is a price the government offers to farmers for farm commodities, many of which the government directly purchases from them. Overall, MSPs act as a floor price for markets and an important price signal for farmers. Higher MSPs induce farmers to grow more.
On average, MSPs were hiked by an overall 5.4%, the government announced on Wednesday. For pulses, the rise is up to 9%, i.e., Rs 425 for a quintal (100 kg).
A back-to-back drought, though, has turned pulses, the commonest source of protein for most Indians, the costliest item in an average meal. If pulses production goes up on the back of higher MSP, it bodes well for the government because that will keep a lid on food inflation. A little bit of agricultural economics though shows this to be unlikely.
It’s not that India doesn’t produce pulses. The country is the largest producer in the world at 17 million tonne annually, or 62% of the world’s output. It’s just that Indians hog a lot of dal, the soupy lentil mix. Output doesn’t match supply, so the country relies on costly imports.
There are five problems that MSPs for pulses won’t fix:
1. Lower yields: India produces a very low 622 kg per hectare yield, compared to 1908 kg/ha in Canada.
2. Long-yielding varieties: This means most Indian pulses varieties take a long time to reach your plate from the fields. Scientific breakthroughs are required to solve this and lower yields.
3. Low irrigation covers: At an all-India level, just 16% of pulses has irrigation, compared to 58% for cereals. Farmers keep the more fertile tracts for cereals and push pulses to areas vulnerable to monsoon shocks. This compounds the low-yield problem.
4. Post-harvest infrastructure: This is just as weak, which means pulses aren’t profitable for traders as well. According to a 2010 NABARD study, processing mills take four years to break even. They lack technologies for automatic drying, relying instead on the sun, which causes post-harvest losses.
5. Varied returns: Due to post-harvest losses, farmers’ returns vary widely from state to state. Their costs, however, are largely the same.
It’s futile, however, to expect a magical uptick in pulses output on the back of higher MSP alone, which will also cause prices to go up further.
While higher MSPs during the previous UPA government’s years – between 2006-07 and 2013-2014 it was at 9.3-15.7% – boosted farm income and raised cereal output, they also caused inflation to spiral. According to Reserve Bank data, a 10% MSP hike raises short-term wholesale inflation by 1 percentage point.
Yet, the consolation in the case of food grains was higher food output – 265.04 million tonne in 2013-14, the highest ever. Such a dramatic rise can’t be expected of pulses because the issues lie elsewhere.
The MSP hike is good to the extent that other reforms to raise pulses productivity follow through. Otherwise, higher MSPs can only result in higher inflation through various means.
According to Sonal Varma, an economist with investment banking firm Nomura, MSPs directly feed into Consumer Price Index (CPI) food inflation. Since rural wages in India under the employment guarantee programme are linked to CPI, higher MSPs can give rise to a wage-price spiral, a phenomenon of higher prices leading to higher wages.