Fears regarding MSP scheme 'exaggerated', claims SBI

New Delhi : Amid growing concerns of rising inflation and commodity prices due to an increase in the minimum support price (MSP) hike announced by the Centre, the State Bank of India (SBI) claimed the fears to be "exaggerated."

In a report authored by Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser of SBI, the bank advised that the government, however, must monitor the progress of the schemes being implemented.

"We believe the proposed scheme as is being implemented by the Centre should be judiciously monitored. Though the talks of market manipulation as is being emphasised is not backed by data, there is no harm if the government closely monitors the registration of the farmers under the scheme is terms of defined outcomes. It is important to at least move ahead with an income compensation scheme rather than perpetually promote a loan waiver culture for the farmers", the report stated.

As per the state-owned lender, two concerns were raised following the announcement of the MSP scheme in the Union Budget 2018-19.

Firstly, the SBI stated that a market perception arose that implementation of market compensation scheme may cost the government as much as Rs 80,000 crore. However, SBI's estimates, it stated, suggest it may be less than one fourth of this figure.

"For example in case of wheat, if we assume that all the production come to the market and after adjusting the procurement figure, the total cost is coming out to only Rs 2325 crore. If we take the monthly average price instead of minimum price during the post harvest months, the cost is even lower. It will be only Rs 650 crore," the report read.

"Similar exercise was also conducted for Paddy, Bajra and Maize with the State level data on production, procurement and market price. For paddy, the cost is coming out to be Rs 1553 crore and Bajra and Maize, it is Rs 2392 crore and Rs 5042 crore, respectively. On conservative basis, our estimate shows the combined cost for Wheat, Paddy, Bajra and Maize will be less than Rs 11,500 crore," it added.

Furthermore, the SBI shed light on misperceptions of the MSP-based deficiency payment scheme suppressing market price as it happened in case of Urad in Madhya Pradesh. However, Ghosh, in the report, argued that post the introduction of the "Bhavantar Bhugtan Yojana" the Urad price not only declined in Madhya Pradesh, but also it declined in states like Chhattisgarh, Maharashtra and Uttar Pradesh. Therefore, the SBI said it is incorrect to blame the decline in price of crops in Madhya Pradesh on the "Bhavantar Bhugtan Yojana", as the decline in prices was a state-wide phenomenon.

"The budget has clearly specified two things- to provide a better price to all Rabi and Kharif crops by fixing MSP at 1.5 times over the cost of production, and supplementing such a scheme to develop an institutional mechanism to compensate the price difference where market price is less than MSP. In fact, it is entirely possible that MSP based on C2 imputed price could be higher or lower than market price and hence what is more important is to look for market prices and not MSP. Hence, the Government decision to supplement the fixation of MSP with a market compensation scheme is the ideal scheme under the current circumstances," the report stated.

The SBI therefore concluded that if the government is not able to procure all the major crops and decides to transfer the MSP based-deficiency payment directly to farmer account, the overall burden will be much less than what is being envisaged in public domain.

On a related note, Finance Minister Arun Jaitley in his budget speech announced that the government decided to keep the MSP for all hitherto unannounced crops of Kharif at least at one and half times of their production cost.

As a primary measure, the government announced raising institutional credit for the agriculture sector to Rs 11 lakh crore for the year 2018-19 from Rs 10 lakh crore in 2017-18.

Taking the government's vision ahead, Jaitley announced the launching of 'Operation Greens' to address price volatility of perishable commodities like potatoes, tomatoes and onions, at an outlay of Rs. 500 crore.