Indian government is planning a price support scheme for paddy that it can’t afford

• The government is reportedly set to announce an increase of ₹200 per quintal in the minimum support price (MSP) for paddy.
  
• This is the single highest increase in the MSP for paddy in a given year in India, besting the ₹155 hike by the Congress in 2008-09.
  
• The scheme could cost the government around ₹120 billion at a time when its finances are already stretched.

With one year to go till the national elections, the profligate spending to appease certain vote banks are in full swing. Farmers, notably, are being courted with loan waivers and price support schemes from the government.

The Modi administration is all set to outdo itself this time around if a report from the Indian Express is to be believed. It is about to announce an increase of ₹200 per quintal in the minimum support price (MSP) for paddy, bringing the overall MSP to ₹1,750.

This is the single highest increase in the MSP for paddy in a given year in India, besting the ₹155 hike in 2008-09 by the Congress ahead of national elections. The move doesn’t come as a total surprise, given that the government declared in the Union Budget for 2018-19 that the MSP for crops would be 1.5 times their production cost. This was apart of the central government’s pledge to “double farmers’ incomes”.

Under a minimum support price scheme, the government pays a fixed amount to purchase crops from farmers, thereby ensuring they can earn a livelihood, and maintaining a buffer stock of that given crop. It is meant to protect farmers from a fall in prices during a season of high production. India’s MSP scheme for rice paddy and wheat has actually been a source of contention with the US, which says that the scheme violates WTO rules.

Unaffordable and potentially ineffective

The MSP scheme for paddy will be a significant burden on the government’s finances. Around 50% of the total amount of land allocated to crops during kharif season is used for paddy. Initial estimates peg the total cost of the scheme at ₹120 billion.

The government is already dealing with a widening current account deficit as a result of higher oil prices and a rock-bottom rupee. With foreign portfolio investors exiting and banks constrained by weak balance sheets, the demand for government securities has declined. As a result, the central government doesn’t have the funds to implement any extravagant public schemes. And it can’t do so without taking on an unprecedented level of public debt.

The scheme is also ill-advised for another reason. It will distort the market for paddy, potentially pushing prices for the crop well above global prices. Also, price support does not equal to livelihood support. A far better way to spend the money would be to help farmers improve their irrigation practices or in plugging leakages in the farm-to-table value chain or in providing farmers with crop insurance.

Anyhow, farmers will celebrate the move in all probability, and pledge their allegiance to the ruling party in next year’s elections. But the scheme will steer away government funds from more vital causes and can also have an inflationary effect, raising prices of rice and other food items.