The expectation this year was that the caretaker government would stick to CACP-recommended support prices in order to avoid attracting the Election Commission's ire. But the government has decided to brazen it out. The CACP recommended an increase of Rs 25 per quintal for paddy grown in states which supply power (for irrigation) free; and of Rs 50 per quintal for paddy from states which charge a minimum power tariff of 50 paise per unit.

But the government decided that dual support prices were not feasible and hiked support prices by Rs 50 per quintal,irrespective of the cost of electricity. This despite the fact that support operations are carried out predominantly in states which supply power free to farmers. The new support prices are a bonanza for Punjab which offers virtually its entire paddy crop to the procurement authorities.

It would have been a different matter if the hike was made conditional on states charging minimum tariff for power; and if the government had decided to widen its support operations to every district that grows surplus paddy. The first would have been a blow for power tariff reform. The second would have ensured that the benefit of high support prices went to producers across the country.

But the government's electoral focus is on the powerful northern farm lobbies. This is what is wrong with the new prices, and not their announcement while the pre-election model code is in operation. The new prices are lavish even though government stocks of rice on July 1 matched the minimum buffer requirement of 10 million tonnes; ifthe kharif harvest turns out to be good, as expected, procurement will touch a record; since offtake slows down after harvest, the rice buffer is slated to bulge.

Issue prices have been kept unchanged. Supplies to the public distribution system will be made out of stocks procured at old prices. Foodgrain subsidy will therefore not rise this fiscal. It will be a different story next year. In the short run, the new support prices (which act as a floor) will give a fillip to market prices of rice. Also, they tilt the terms of trade strongly in favour of agriculture. This will raise industry's input costs, including labour costs (wages being index-linked), though higher farm incomes should translate into strong demand for manufactures.