Given how the terms of trade have, by and large, been restored after several years of large hikes in the minimum support prices (MSPs) of various crops, the Commission for Agricultural Costs and Prices (CACP) has done well to mute its recommendation for a hike in MSP for the 2014-15 kharif season. Moreover, given the bulging stocks of FCIs granaries, the move makes even more sense as farmers have to be moved to crops other than the staple wheat and rice. While MSP for wheat has been increased by just 3.7% for 2014-15, the commission has now favoured a 4% hike in the case of paddy. This may seem low, but keep in mind the MSP for wheat was hiked by over 97% between FY06 and FY12; and by nearly 90% for rice. A CACP study shows that net returns for rice went up from an average of R66 per hectare during FY01-04 to R1,876 per hectare in FY05-08, and to R5,044 in FY09-FY11for wheat, the numbers are R3,687, R7,268 and R11,534. The CACP strategy has been a simple oneget the incentives right. So, while wheat and rice prices have risen more, keeping the MSP growth low is a signal to farmers to reduce their acreage of these crops and move to other ones. In last years kharif, for instance, there was a large hike in the MSP for barleythe year before, there was a big hike in maize MSP, to help farmers switch.
With this switch made, it is time to move to the next plank of the CACPs strategy. Which is to move away from just MSPs and, instead, start using per acre subsidiesthis has the added advantage of being WTO-compliant since such subsidies are crop-neutral and do not distort trading patterns. The immediate consequence of such a policy, announced by the finance minister in the budget last year, is that it will help farmers in states like Bihar and West Bengal to cultivate more of wheat and rice. Normally, this could be done by FCI buying more grain in these states, but since FCI is conspicuous by its absence, a per acre subsidy is easier to administer. And lowering of stocks with FCI has the added advantage of ensuring less of its rots due to inadequate storage capacities.