Increasing MSP: playing with fire?

The Sindh government is playing a dangerous game. Last week, it recommended increasing wheat support price to Rs 2,000 per 40 kg for the upcoming 2021 rabi season - an increase of 42 percent from Rs 1,400 MSP fixed in the outgoing season. Ostensibly, the recommendation has been made to ensure that farmers are adequately compensated for their increasing cost of production, and to bring farmgate price at par with resurgent global prices. The PTI government must demonstrate spine by resisting temptation to buckle under populist pressure.

The gambit appears to be a replay of a story from late 2000s. In 2007-08, the outgoing military government increased support price from Rs 425 to Rs 625 after global prices nearly doubled in less than a year. However, it delayed the decision well into March of 2008 – by when harvest is at its peak – leaving the incoming PPP government at the centre to deal with the wreckage of food inflation. To keep up its pro-farmer credentials, the PPP government had to increase MSP to Rs 950 in the following season, even as global wheat prices began to climb down.

And that is the trouble with minimum support prices. Like the arrow of time, they only point in one direction, which is upwards. The motivation is to buttress the incomes of the farming community; however, it has increasingly become a tool to manage smuggling; each time domestic commodity prices become competitive in international market due to sudden currency devaluations or global price spirals. If MSP is increased to Rs 2,000 after all, domestic farmgate price will climb to $312 per ton, well-above global market prices ranging between $200 - $250 per ton.

It is disingenuous to pretend that the imposition of MSP serves any welfare objectives. In fact, increasing prices in domestic market to curtail smuggling is admission of administrative failure of the worst order. And over the last two decades, political regimes of all hue and colour have been guilty of it.

Who is the beneficiary? Many will immediately point fingers at politically connected large farmers, who sell the grain to Food Department and receive official rate. Maybe, but consider that between June 2010 and 2020, total commodity operations debt (federal and provincial) has doubled from Rs 400 to Rs 800 billion. According to a 2015 World Bank study, “annually, the [Punjab] government spends over 90 percent of the [wheat procurement] program costs on bank mark-ups, a substantial proportion of which is due to past accumulation of debt in the system”. Government’s intervention in the wheat market is thus, not public welfare or socialism, but in fact rent seeking capitalism of the worst order, as its greatest beneficiaries are commercial banks - and definitely not small farmers or consumers.

But cost of production has compounded in recent years, many insist. Will Pakistan be able to deal with a shortfall if farmers deem MSP insufficient and reduce cultivation? To think that acreage under wheat would decline precipitously unless the support price is increased is an insult to the collective wisdom of our growers. Last year, Pakistani farmers – driven by pure self-interest - increased acreage under rice when currency depreciated to benefit from increased export demand. But are not smart enough to increase wheat cultivation when there is clearly a domestic shortage and prices on an upward spiral?

There is also fear that in case MSP is not increased, farmers will be fleeced by middlemen who will procure at last year’s rate and sell at higher prices in urban wholesale and retail markets. In fact, increasing MSP does the opposite. According to a 2009 Boston University brief, once middlemen begin to anticipate an increase in MSP, they start hoarding last season’s supply procured at lower rates, and then sell it back to the Food departments in the following harvest season at a much higher price.

Domestic grain prices must be allowed to converge with international prices – in fact, subsequent governments have always shown willingness to do just that by increasing MSP substantially. However, the obvious loss of MSP imposition is to consumers, who are unable to benefit once global prices decline, but the MSP remains unchanged.

PTI’s response to the current wheat crisis can prove to be a litmus test of its reform-mindedness. Rather than buckling under pressure from vested interest, it should instead render the MSP irrelevant. This can be achieved by announcing a ‘reference’ MSP equivalent to landed cost of imported wheat, while at the same time reducing its procurement target substantially, thereby allowing the open market to make its own price discovery. Yes, retail prices will increase in the short term, but will also decline once international prices reverse gear.

Unless of course, just like the outgoing regime in 2008, PTI believes it won’t have to face the inflationary fall out from increasing the support price. In politics, that would be the ultimate checkmate.