MSPs can’t keep up with production cost
Federally fixed minimum support prices (MSPs) for crops have failed to keep pace with input costs, or expenses farmers incur towards cultivation, according to data from the Commission for Agricultural Costs and Prices — one reason for farmers protests across the country that could have significant economic and political impact.
The cost of cultivation varies across states, while MSPs are based on a weighted all-India average, another reason farmers don’t get guaranteed profits.
A key reason for the current agrarian distress is that farmers have failed to get even MSPs for their produce. Worse, they have got negative returns in several crops, prompting many economists to question the usefulness of MSPs, a policy in force since 1965. Farmer protests have forced several states to waive agricultural loans, at a cost of several tens of thousands of crores. More such waivers may be in the offing, with Karnataka being the latest to jump on to the bandwagon.
The Modi government is expected to announce this week its widely anticipated MSPs for 23 crops for the kharif or summersown season. To woo farmers, the government has said that MSPs would be set at 1.5 times the cost of production so that farmers get at least 50% returns on total costs.
The move to offer higher crop prices marks a key shift in the Modi government’s approach. Unlike in the previous UPA years, under the Modi government, MSP hikes have been marginal, except for pulses, mainly to keep overall inflation in check and in line with the Reserve Bank of India (RBI)’s target.
Between 2010 and 2014, MSPs grew 12% on average, while between 2015 and 2018, they grew only 5%, according to data from credit rating firm Crisil. Even so, during 2017-18, of the 14 major crops which account for 80% of the total area sown, eight crops — mainly pulses and oilseeds — traded below MSPs, the data shows. Calculations by economist T Haque, who formerly headed the NITI Aayog’s land cell, show that input costs have risen faster than MSPs. For instance, between 2004–05 and 2014–15, cultivation costs of paddy grew by 11.2% annually in Bihar and 11.9% in West Bengal, while the MSP of paddy increased at the rate of 10.6% per year.
A variety of reasons have prompted analysts to wonder if MSPs have outlived their utility. MSPs, recommended by the CACP, are supposed to act as a floor price for private traders, thereby helping avoid distress sales. They are also designed to serve as a price signal to farmers, who tend to shift to crops that come with higher support prices.
In kharif 2017, net margins (difference between market price and cost of production) were negative for many crops. According to calculations by Ashok Gulati, the Infosys Chair Professor of Agriculture at ICRIER, during 2016-17 too, there were negative margins on jowar (-18%), sunflower (-13%), groundnut (-4%), ragi (-20%), moong (-7%) and urad (-4%). A new paper published in the journal EPW by T Haque and PK Mishra, the head of the International Food Policy Research Institute, argues that India should now explore alternate models to boost farmers’ income and stop relying on MSPs alone.
Haque used a more comprehensive definition of a farmer’s cultivation cost known as C2, which includes imputed costs of capital assets and rental value of land. In deciding MSPs, the government will continue to use the so-called “A2+FL” measure, which includes all out-of-pocket expenses plus the value of family labour used.
“Farmers in general are unhappy with the MSP programme because the input costs in crop production have recently gone up at a faster pace than the MSPs. To improve farm income,
NEW DELHI: COST OF CULTIVATION VARIES ACROSS STATES, WHILE MSP IS BASED ON A WEIGHTED ALLINDIA AVERAGE, ONE MORE REASON FARMERS DON’T GET GUARANTEED PROFIT
the challenge now is to find new markets,” Mishra said.
Government think-tank NITI Aayog is already working on alternative mechanisms. There is a strong possibility of the government moving towards a price deficiency payment mechanism, whereby farmers, when they fail to get MSPs, could be directly paid the difference between MSP and prices they receive.