Today’s post is related to the Financial Express article posted in its opinion section, dated July 17, 2018. Following is the link:
The article starts off by stating that every economic policy will have a trade off, which is true and the most common theory which we as economists learn is the Phillip’s curve (the trade-off between inflation rate and the rate of unemployment). In this article, the author has focussed on the impact of Minimum Support Price on the economy, and whether the support reaches the true beneficiaries or not. We encourage you to read this article to understand various economic concepts mentioned and the relation between the two. Lets start by introducing you to the theories:
1. High Minimum Support Prices: As we are all aware about the deteriorating economic conditions of the farmers and the agricultural sector at large in India, providing high minimum support price will have many consequences, the foremost being increasing the nominal income of the farmers. With the rise in nominal income, the savings will increase, and the cultivators will be in a position to reinvest back, assisting them in increasing the overall productivity of land (assuming that investment made is productive in nature). However, on one side the picture theoretically seems to be apt, but in practice, there are flaws prevailing. Firstly, real income may or may not increase, and if it does not, then the objective of MSP fails. Secondly, we are still lagging behind in terms of knowledge or literacy and even technology as far as the agricultural techniques are concerned. So if cultivators are not aware about the new technology available and still prefer to adopt orthodox techniques of production, there won’t be much change in the productivity levels. Third comes the reinvestment in land. We, in India, are still bound by societal rules. Therefore, a poor farmer prefers to spend more on rituals than making a productive investment. Lastly, and the most important being the lack of financial education. The poor farmers still depend on local or village moneylenders for their daily needs, who in turn charges exorbitant rate of interest, thus burdening them under debt. So whatever extra benefits they might receive from a higher MSP, would not help in developing the state of the farmers. Therefore, MSP is a necessary step to improve the state of agriculturists and agriculture, but it is not a sufficient step.
2. Using Regression to understand the impact of MSP: Regression is used when we need to determine the strength between the dependent and the independent variable. In the article, WPI is the dependent variable and MSP is the independent variable. The relationship was taken to understand what impact will the rise in MSP have on the price level. The results show that for 10 per cent rise in MSP, there is a rise of 5 per cent in the price level for crops like rice and cotton. However, for pulses, the relationship came out to be negative and insignificant, implying that in case of pulses, it is the market forces which determine the price level and MSP has no role.
Similarly, coefficient of determination is used to understand the relationship and the movement of two variables, that is, MSP and Price level. The closer the figure is to 1, the higher the correlation between the two variables, lesser will be the impact as the rise in price level will negate the desired objective of MSP (which at first place was to improve the conditions of the cultivators economically).
The question arises, in an era where the farmer suicides are on the rise, they are burdened under huge amount of debt, poor infrastructural facilities, poor irrigation, high dependence on weather (implying high uncertainty), poor transportation facilities, poor storage facilities, problem of disguised unemployment; is MSP enough (we are not getting into bureaucratic delays as of now)? Rigorous measures are needed from the government. But, sadly the state of the farmers becomes the talk of the town only during the elections. Their conditions have been neglected since the Second Five Year Plan. It is high time we protect the cultivators of our country, and thus we request the government to take the situation seriously and not be driven by political agendas. Let’s accept the fact that farmers need protection more than any business tycoon looting the public money and living their lives luxuriously. Ironically, in this country the providers of food are denied two meals a day, and we as Indians need to ponder on the fact that are we truly a welfare state, which we proudly boast about?
(Image courtesy: IndiaMART.com Link: https://www.indiamart.com/proddetail/agriculture-projects-15176293612.html)