“Growth and
Welfare Consequences of a Rise in Minimum Support Prices”
Citation: Parikh, K. S., A. Ganesh-Kumar and
G. Darbha. 2003. “Growth and Welfare Consequences of
a Rise in Minimum Support Prices”. Economic and Political Weekly, 38(9),
pp. 891-895.
Abstract: This note summarises the results of
a recently completed study that examined the consequences of increasing the
Minimum Support Price (MSP) of wheat and rice by 10 per cent, with an applied
general equilibrium model of India with 65 sectors, and five rural and five
urban expenditure classes. The results show that a 10 percent increase in the
MSP of wheat and rice leads to decline in overall GDP by 0.33 percent, increase
in aggregate price index by 1.5 percent, and reduction
in investments by 1.9 percent. Even the increase in agricultural GDP resulting
from higher MSP dwindles rapidly and only a miniscule positive impact on
agricultural GDP remains by the third year. More importantly, in terms of
welfare the bottom 80 percent of the rural and all of urban population are
worse off. One should emphasize here that the adverse impact of increases in
MSP is related to the level of MSP to begin with. MSP levels much above market
clearing prices are not desirable and that in normal or modal year they should
remain below the market clearing prices. In an exceptionally bumper year the
market clearing prices would be lower than the announced MSPs and it is in such
years farmers need support.