Minimum Support Price, or MSP, is a good step that will help boost farm productivity, which will in turn spur rural economy and give a fillip to consumer spending.

According to Arindam Banik, Director, International Management Institute Kolkata, the Budgethas taken the right step in announcing a MSP for farm produce. MSP will be 1.5 times the cost of production.

Farmers obviously are still not prepared to react positively to market-determined prices and take a call on their produce. As such, MSP comes in as a viable solution.

“MSP will trigger productivity across the farm sector. I do not think it should lead to a rise in food inflation. However, the increased farm productivity will lead to a spurt in rural growth and consumer spend,” he told BusinessLine on the sidelines of a seminar organised by the Merchants’ Chamber of Commerce and Industry.

In order to produce $1 worth of rice, the United States provides a subsidy (both direct and indirect put together) of 45 per cent and Europe provides around 65 per cent. Compared to it, the subsidy component in India is just 12 per cent.

As Banik points out, Indian farming has to be more efficient and this will need some people to move out of the sector. But for that to happen, manufacturing activity needs to pick up.

No inflationary pressure

Moreover, it is unlikely that the newly-announced MSP calculations will breed inflationary pressures as has been the fear in many quarters.

According to Mayank Jalan, CMD, Keventer Agro, the government may not use comprehensive cost of production, or C2 costs, as the benchmark for calculating returns. C2 takes into account multiple components. This includes A2 costs or costs incurred by farmers on seeds, fertilisers, chemicals, hired labour, fuel and irrigation, the imputed value of unpaid family labour, and the rentals and interest forgone on owned land and fixed capital assets.

“In the past MSP was set at C2 plus 10-15 per cent. When the announcement of offering 1.5 times MSP came, we thought that it will lead to food inflation. We wanted it to be done in a phased manner. However, we, later realised that the formula of calculation has changed,” said Jalan at a post-Budget interactive session, which was organised by FICCI on Friday.

The MSP is likely to be offered 1.5 times on A2. “Hence it will not lead to inflation,” he pointed out. With the Centre looking to push through its flagship social-sector schemes, including the Modicare health project, it is most likely that it has to resort to market borrowings. This means an end to the low interest rate regime and infrequent rate cuts by the RBI, said IMEI’s Banik.

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