Continuous MSP hike, oversupply in world market dent India's farm exports

At a time when global agricultural commodity prices have been on the decline due to oversupply, the sustained increase in the minimum support price (MSP) by the Indian government has over-priced the country's agricultural commodities in the world market, reducing India’s competitiveness in farm exports. Between FY13 and FY19, the government of India raised MSP of various agricultural commodities by 40-70 per cent.

Going by World Bank's latest commodity outlook which states that global farm prices are expected to remain weak for some more time, exporters of agro commodities have no respite in near future. RCEP-type agreements will only dampen the prospects of increasing farm exports further, because they may open up floodgates for imports.

Data compiled by the Ministry of Commerce showed India’s overall exports of agricultural commodities stood at $28.62 billion for the financial year ended in March 2019. Exports did improve a bit from the low base, but were still lower by 13 per cent compared to the peak seen in FY14. And in current year, the downward trend has continued.

For the period between April and September 2019, India’s exports of farm produce declined by 4.8 per cent to $12.86 billion from $13.79 billion last year.

"In a globalised economy and in a scenario in which the government of India going ahead with negotiations on various free trade agreements (FTAs) and Regional Comprehensive Economic Partnership (RCEP) agreements, the role of MSP has become meaningless, because if the international market offers a product at a price lower than India’s MSP, traders would import instead of buying from the local farmer. As a result, India’s export opportunity would reduce going forward as a continuous hike in MSP would make India’s agricultural commodities over-priced in the world market,” said Vijay Sardana, an expert on agriculture and food sectors.

Bulk consumers of commodities like maize and wheat in southern India have started importing to meet their demand as sourcing from local farmers has become costly. Juice makers have also started importing raw material.

"Therefore, the government must keep international prices in mind before fixing the MSP of any agricultural products. Otherwise, consumers will get imported products and farmers will be forced to sell at reduced prices in order to survive. This will hurt their livelihood, welfare and health," said Sardana.

Madan Sabnavis, Chief Economist, also believes that the increase in MSP will hit the exports of some commodities.

Meanwhile, a recently released World Bank report forecasts greater downward pressure on commodity prices, with stock levels hitting a multi-year high. Most agricultural commodity prices appear to have stabilised recently. The report further states that the high stock levels for some grains such as rice and wheat, favourable weather conditions in key producing regions, ongoing trade tensions, low energy costs, and weakening demand for some commodities would continue to weigh on prices.

In fact, the World Bank’s Agricultural Price Index declined nearly 2 per cent in July–September 2019 and stands 3.3 per cent lower than a year ago. Most sub-indexes declined in the quarter. Prices are projected to fall nearly 5 per cent in 2019 and to stabilize in 2020—a sharp downward revision of the April forecast of two per cent each year. Most of the risks are downside and emanate primarily from protracted trade tensions and lower input costs.

“Prices of some agricultural commodities such as soybeans and corn may improve if there is the resolution of trade tensions,” said Ayhan Kose, Director of the World Bank’s Prospects Group.