Government hikes MSP for wheat by Rs 85/quintal; pulses

up to Rs 325/quintal
PTI | Updated: Oct 23, 2019, 18:11 IST

https://timesofindia.indiatimes.com/india/government-hikes-msp-for-wheat-by-rs-85/
quintal-pulses-up-to-rs-325/quintal/articleshow/71722361.cms

NEW DELHI: The government on Wednesday hiked the minimum support price for
wheat by Rs 85 to Rs 1,925 a quintal and for pulses by up to Rs 325 per quintal.

A decision in this regard was taken at a meeting of the cabinet Committee on

Economic Affairs (CCEA), headed by Prime Minister Narendra Modi.

The MSP is the rate at which the government buys grains from farmers.

“In a move to increase farmers’ income, the Cabinet has increased the MSP of rabi
(winter-sown) crops for the current year,” information and broadcasting minister
Prakash Javadekar told reporters after the meeting.

The CCEA has approved Rs 85 per quintal hike in wheat MSP to Rs 1925 per quintal
for the 2019-20 rabi crop, from Rs 1840 per quintal last year.

To encourage cultivation of pulses, the support price of masoor has been increased
by Rs 325 to Rs 4800 per quintal from Rs 4475 per quintal last year.

Similarly, the MSP for gram has been hiked by Rs 255 to Rs 4875 per quintal for this
year from Rs 4620 per quintal last year.

Among oilseeds, rapeseed/ mustard MSP has been increased by Rs 225 to Rs 4425
per quintal for 2019=20 rabi crop from Rs 4200 per quintal during 2018-19.

The minimum support price for safflower has been hiked by Rs 270 to Rs 3215 per
quintal from Rs 4945 per quintal last year.

The MSP for rabi crops announced for this year is in line with the recommendation of
the government’s farm price advisory body CACP.

Wheat is the main rabi crop, sowing of which will begin next month. The crop will be
marketed from next April onwards.
 The article talks about government’s decision to hike minimum support price for
pulses by up to Rs.325 per quintal and Rs.85 per quintal for wheat in India.
Minimum-Support Price (MSP) is a market intervention by the Government of
India to insure agricultural producers against any sharp fall in farm-prices. 1
This was done to incentivise the farmers to produce more of the respective crop and
to increase farmers’ income.

Government intervention in any form, including minimum price, reduces community

surplus and leads to welfare loss. Nevertheless, the government deems it essential
to intervene to support the income of the farmers and to encourage cultivation of
crops. The demand and supply for agricultural crops is price inelastic since they
have no substibutes, are necessities and arguably because of low percentage of
income spent on them. Demand or supply for a good is price-inelastic when the
percentage change of quantity demanded or quantity supplied is smaller than
the than the percentage change in price. Primary products have a low PES
because of huge production lags, limited availability of land for cultivation and the
perishable nature of goods which prevents it from being stored for too long.
Impact of elasticity of primary Commodities

y S
e
Pric
(Rs)

P*

D*
D x
Q Q* Quantity of wheat
(Quintals)

1
“Vikaspedia Domains.” English, vikaspedia.in/agriculture/market-information/minimum-support-price.
 As both demand and supply are price inelastic a slight shift in either of them (for
instance the shift of demand curve in the following diagram from D to D*) will cause a
huge change in price from P to P*. This showcases that primary commodities prices
can be highly volatile causing farmers to have unstable incomes. This discourages
farmers to invest, expand and borrow.

To mitigate this uncertainty, the government of India has decided to impose a

minimum-price on certain major crops like wheat and pulses. The diagram below
analyses the impact of price floor on wheat which is a staple crop in the country.

Effect of Purchase of Surplus by Government due to Minimum Price

Excess supply=
y surplus
S
e
Pric
(Rs)

a A B
1925
Welfare
f
b Loss
c
1840
e
d

D D1(= D+ government purchases)

x
Qd Q* Qs Quantity of wheat
(Per Quintal)

The graph above shows the imposition of effective minimum support price at,
Rs.1925, set by the government above the equilibrium price, Rs.1840. A minimum-
price is the lowest possible price set by the government that producers are
allowed to charge consumers for the good or service produced. 2 A minimum
price is set above the market price. At Rs.1925, consumers are willing and able to
buy quantity Qd, but farmers are willing and able to supply quantity Qs, creating a
surplus amounting to Qs-Qd, which usually would be bought by the government. Due
2
“Government Intervention: Minimum Price / Price Floor - IB Notes.” The IB Economist,
ibeconomist.com/revision/1-3-government-intervention-minimum-price-floor/.
to minimum price, the initial consumer surplus was ‘a+b+c’ which reduces to ‘a’ and
producer surplus increased from ‘d+e’ to ‘b+c+d+e+f’. This results in overallocation
of resources due to a surplus created leading to a welfare loss shown by the green
highlighted area.

To support producers, excess supply is bought by government causing a burden on

its budget. This leads to the demand curve shift from D to D1. There is an
opportunity cost because the money could have been spent elsewhere by the
government. The surplus is usually stored under the Buffer stock scheme, leading to
additional costs of storage. Another alternative is to export the surplus, however, the
government will have to give subsidies and this will also cause the local farmers in
other country to suffer in the form of lower revenues/ falling prices. Also, other
counties also might retaliate and consider at as dumping which is when a country
exports a product at a price which is lower that their domestic price. 3 This surplus
can also be used to provide food-aid to other countries but that would also depress
food prices in the recipient country causing famers in that country to suffer. Due to
the imposition of minimum-price, consumers are worse-off too, as they have to pay a
higher price for the good while they can buy a smaller quantity. However, the
producers gain by receiving a higher price and producing a larger quantity which
increases their revenue. Minimum price may encourage farmers to use all the barren
land for agricultural purposes. Minimum-price would also allow inefficient farmers to
continue production who otherwise may have shut-down as their average cost would
have exceeded the equilibrium-price.

Government’s effort to increasing the minimum-support price every year, may not be
enough if their average production cost has been increasing by way more. Lastly,
such announcements of minimum support prices may cause ecological-problems
because the farmers may overexploit the land and soil and use unsustainable-
practices because of avarice. Thus, even though this scheme is going to benefit and
encourage the farmers, it can potentially harm the prospects of other stakeholders
and make farmers dependent on the government in the long-run.

3
Barone, Adam. “Dumping.” Investopedia, Investopedia, 28 Aug. 2020,
www.investopedia.com/terms/d/dumping.asp.
Word Count: 750

BIBLIOGRAPHY

“Vikaspedia Domains.” English,

vikaspedia.in/agriculture/market-information/minimum-support-price.

“Government Intervention: Minimum Price / Price Floor - IB Notes.” The IB

Economist, ibeconomist.com/revision/1-3-government-intervention-minimum-price-
floor/.

Barone, Adam. “Dumping.” Investopedia, Investopedia, 28 Aug. 2020,

www.investopedia.com/terms/d/dumping.asp.