The real gains of new MSPs
Minimum Support Price for rice gave a return of 50% over cost 13 times since 199697
The Union cabinet announced Minimum Support Prices (MSPs) for the 2018-19 Kharif marketing season on Wednesday. MSPs for all crops are at least 50% more than the projected A2+FL cost of production.
Broadly speaking the A2+FL measure takes into account the following: value of agricultural inputs such as seeds and fertilisers; hired human, animal and machine labour; land revenue and irrigation charges; depreciation of farm implements and buildings; interest on working capital; rent paid for leased in land; and imputed value of family labour. In a tweet, Prime Minister Narendra Modi described this move as a fulfillment of his government’s promise of providing cost plus half returns to farmers and termed the decision as historic.
Interestingly, this is not the first time an MSP that is 50% over the projected production cost is being offered.
Rice is the most important crop for procurement in the Kharif season. An HT analysis of MSP and A2+FL cost measures (actual and projected) for rice shows that MSPs giving 50% return over cost are not new. In fact, the MSP for rice has given a return of at least 50% over A2+FL 13 times since 1996-97. However, this is the first that rice MSPs will give a return of 50% over A2+FL under this government.
What farmers’ organisations have been demanding is that MSPs provide a return of 50% over the C2 measure of cost, which broadly includes imputed value of rental on land in addition to A2+FL. This demand has never been met in the past two decades. If rice MSPs were to provide 50% returns over C2, this would have entailed an average increase of 40% in MSPs over the past two decades. This will need a significant increase in procurement budget. (Chart 1)
These statistics should not diminish the importance of the hike in MSPs this year though. Letustakethecaseofrice.If rice procurement in the 2018-19 season were to be the same as the previous season, the MSP hike will lead to an additional income ofmorethan~7,000 croreforrice farmers. What is even more interesting is the state-wise distribution of these gains. (Chart 2)
Chhattisgarh, which will go to polls in the end of this year, will see an additional income of more than ~600 crore. Punjab and Haryana alone will pocket 45% of the total gains from increased prices. Because rice is harvested around October, farmers will probably have received these gains before the next set of assembly elections. To be sure, gains from an increase in MSP are likely to exceed simplistic calculations such as these. This is because a rise in MSPs also generates tailwinds for farm prices in general. The government will be hoping that this additional income will help it contain the anti-incumbency due to rural distress in the elections.
There is one factor which could spoil these plans though. The government has assumed that A2+FL cost of rice will grow by 4.4% in nominal terms between 2017-18 and 2018-19. This is the second lowest nominal growth in cost of production in this decade. This seems a bit odd given the upwards turn in the inflationary cycle. A higher rise in MSPs is likely to add to the spike in inflation. This can lead to a situation where the actual cost of production in this season could be much more than what the government has estimated. Since MSPs are not going to be increasing, farmers might end up earning less compared to what the government thinks they will.
WHAT FARMERS HAVE BEEN DEMANDING IS THAT MSPs PROVIDE A RETURN OF 50% OVER THE C2 MEASURE OF COST. THIS DEMAND HAS NEVER BEEN MET IN THE PAST TWO DECADES