A Blog dedicated to cricket

The gamut of issues I am wanting to write is expanding by the day. To make it easier to I am starting on my first dedicated blog bat the talk. This will be a blog solely dedicated to my musings on cricket. Since cricket is a field I am extremely passionate about, expect to see a lots. Hope you enjoy reading it.

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Minimum support price- A form of government sponsored inflation

Minimum support price (MSP) is a mechanism to regulate prices, wherein trading below an administered floor price in a commodity is prohibited. This is done to ensure that farmers get a minimum price for their produce and can at least recover their costs. However, lofty the idea may sound, the floor price fixed by the government for various agricultural commodities, provide valuable insights as to how minimum support price is acting as a means of government sponsored inflation. The MSP for most of the agriculture commodities has been steadily increasing. The quantum of increase is usually colossal in election years as governments want to project such increases in MSP as pro-farmer schemes and thereby, capture a greater share of the vote bank. The UPA government even takes pride in the fact that it had hiked the MSP for agricultural commodities for a greater number of times than the previous NDA government and included this as part of its election campaign.

The MSP for rice has increased from 650 per quintal in 2005-06 to 1030 per quintal in 2009-10 and for wheat it has been increased from 570 per quintal in 2005-06 to 1080 per quintal in 2009-10.The MSP for other commodities have also increased by a similar margin. When India is aspiring to lower inflation rates to about 4%, such mammoth increases in MSP seem unacceptable.

Since trade below MSP is prohibited, any increase in the MSP is bound to contribute to an increase in the price of the commodity in the market and hence an increase in food inflation. Theoretically if the MSP is above the equilibrium price determined by the forces of supply and demand, MSP is supposed to be unavailing. However, since MSP also represents the price at which government procures commodities from the farmers, farmers would never part with their produce for a price below the MSP, as they can sell to the government at the MSP. Hence, in practise the MSP represents the minimum price at which trade on a particular commodity would occur irrespective of whether the MSP is greater or lesser than equilibrium price. Further, equilibrium prices established by market forces are bound to vary year on year. There might years where equilibrium prices of agricultural commodities would plummet. However, due to political compulsions no government would revise the MSP downward and reluctance to hike the MSP, even in a good monsoon year is considered an anti-farmer measure and the party at helm faces heavy rebuttal.

While a host of factors are being cited for the high levels of food inflation, the contribution of the government to the cause cannot be ignored. As long as the governments at helm continue to indulge in inflating MSP, food inflation is here to stay.

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