Increase in MSP another step in sharing wealth with the rural poor.….

In my post yesterday, I wrote about why the RBI should not worry about the inflation staying at 10%. In my view, the target for inflation itself should be re-set to 8% or so. The reason for this is that unlike usual inflation, this one is harmless. The poor are not getting hurt by it. In fact, it is a result of the poor getting more money in their hands. This inflation is not arising from conventional demand-supply mismatches. There are no bubbles here that should concern the RBI. This inflation is coming from a never-before-seen re-distribution of wealth. The rural poor are being showered with goodies and as they are prospering, they are exerting pressure on food prices. As I also argued yesterday, most urban folks are protected against this inflation by their annual salary increases.

The MSP (Minimum Support Price) is the price paid to farmers if they choose to sell their foodgrains to the government. By increasing the MSP by 15-39%, the government has tried to do two things. One, it will help the farmer offset the higher input costs – most importantly farm labor costs (which have increased due to NREGA as argued yesterday) and two, it has tried to transfer wealth into the hands of the farmers. Farmers are the new political constituency that Rahul Gandhi has taken upon himself to develop. His belief is that if farmers are happy, they will vote the Congress back to power. The one anti-dote to the wrath of the urban middle-class on corruption matters is the support of the farmers. Farmers care for more income in their hands rather than some obscure corruption charges. This is astute political strategy. And fortunately, it is also astute economic policy also.

Its good politics because farmers is a large bunch of people united together only by profession (farming). When one builds a political strategy based on farmers, one moves away from the usual divisions in society – conventional political constituencies of caste (BSP, SP, RJD, RLD, INLD….so much of Hindi heartland parties really), religion (BJP, Shiv Sena, IUML, etc) and language and regional identity (almost all Tamil parties; Shiv Sena partly etc). In pursuing a political strategy which focuses on farmers, the Congress will have a unique identity (positioning) for itself. The only parties that will compete with the Congress for this positioning are the Left parties. Given the recent poll performance of the Left – and its defunct ideology of communism – the Congress wouldn’t worry too much about the Left. The Congress has been working on farmer’s issues for some time now with new laws of Land Acquisition, Mining etc on the anvil. The likely tie-up in UP with Ajit Singh (son of “kisan leader” and former PM, Charan Singh) is also a step in this direction.

It’s good economic strategy because every economist will say that if there is better distribution of wealth, the growth of the country is a lot more stable and sure. With more number of participants in a country’s story of progress, the progress itself is that much stronger. One of the biggest criticisms about capitalism is that it leads to large economic disparities. It’s common for experts in India to complain that on the one hand, Mukesh Ambani’s house is reportedly worth Rs 4000 crores and on the other hand, there are a few hundred million people who cannot afford even the most basic form of a roof over their heads. When income is re-distributed, it will help bring the poorest sections of the society into the growth story. And make it inclusive growth, so to say.

Already, with a strong rural economy, there is a buzz around the consumer sectors. India has always been a consumption story and with more money in the hands of the farmers, the consumption story is bound to improve. Talk to investors today and they will tell you that any investment in the consumer sector is a good investment. By increasing MSP, that consumer sector is being sought to be made stronger.

In addition to being good political and economic strategies, this increase in MSP is also in line with Congress’s past thinking as well. In the six years of NDA rule (between 1998 and 2004 or so), the MSPs hardly rose. For eg, the MSP of Rice rose by 25% in six years; of wheat by 15%, of course grains by 29% and of daal (lentils) by 43% or so. In contrast, during the same period of UPA rule (six years), the MSP of rice rose by 70%, of wheat by 72%, of coarse grains by 63% and of different types of daal (arhar, moong, urad) by between 65-96%. It’s the same story with non-food crops as well. During the NDA’s six years, MSP of sugarcane increased by 39% (74% during UPA), of Cotton by 17% (UPA 53%), of groundnut by 35% (UPA 40%), of soyabean by 19% (UPA 50%) and of sunflower by 18% (UPA 65%). In spite of this, wholesale price inflation during the NDA and UPA regimes has been nearly the same at around 5%…..with the exception of 2008-9 and 2010-11 (and continuing now into 2011-12) when the inflation has been higher largely on account of NREGA (impact felt in these years though NREGA was launched around end-2005).

The RBI did go ahead and increase interest rates yet again. Again, my expectation that this will have no impact on the inflation. The strategy is wrong and it is bound to fail.

The new manufacturing policy announced by the government will hopefully get more investements flowing. We need to look out for more details before commenting on it. If it leads to more employment generation – the way manufacturing did in China – it will be a good policy. India cannot depend only on the services sector for its growth. It needs a strong manufacturing sector as well.

The real truth is that the politics of the Congress is clear. It’s target is the aam aadmi – and that does not mean people like us. It means the rural folks who depend on agriculture for their livelihood. The Congress may make symbolic gestures towards placating the urban middle-class, but its real focus always has been and will continue to remain the rural poor…..