MSP hike: Neither unprecedented, nor historic

The Centre approving the decision to hike the minimum support price (MSP) of 14 crops for the 2018-19 marketing season earlier this month is a welcome relief for farmers reeling under severe distress due to collapse of agricultural commodity prices. In his press briefing, home minister Rajnath Singh hailed this as a ‘historic decision’. In 2014, the BJP’s poll promise was to provide farmers a profit margin of 50 per cent over their cost of production for all the notified crops. Prime Minister Narendra Modi, who chaired the meeting of cabinet committee on economic affairs that approved the MSPs on July 4, called it a ‘historic increase’.

Of the 14 summer sown crops, seven crops have reportedly been given a hike of around 20 per cent over their MSP in 2017-18, while paddy – the most popular kharif crop – has got only 13 per cent hike. In percentage terms, the median increase in MSP approved by the government comes to 25 per cent, as compared to 3 to 4 per cent increase in the first four years of the Modi government. However, since the government’s procurement is limited mainly to paddy and wheat, the announced MSP for most other crops is of little value to farmers. But is this the highest ever increase in MSP, as the government has claimed.

The latest hike in MSP is neither unprecedented, nor historic. RBI data suggests that the MSP hike for paddy in 2007-08 under UPA at 29 per cent far exceeded the current increase in percentage terms. What’s more, from 2007-08 to 2009-10 – 29 per cent in 2007-08, 21 per cent in 2008-09 and 17 per cent in 200910 – the MSP hike for paddy was nearly 100 per cent. However, despite a false claim, the noticeable feature of the current hike in MSP is the change in government’s approach to farmers’ plight four years after it came to power. But whether it materialises in higher income for a large majority farmers remains to be seen.

The timing and political backdrop of the increase in MSP, with significant hike allocated to coarse grains and oil seeds than paddy and cotton, is also important in the pre-election year. It is said that it may help the BJP politically in the poll-bound states of Madhya Pradesh, Rajasthan and Chhattisgarh, which are the major coarse grain producing state. It is also aimed at helping the prime minister in his bid for a second term next year which is expected to be much tougher than his massive win in 2014.

In his campaign in 2014, Modi had promised that if voted to power, his government would implement the recommendation of Swaminathan commission. There are three definitions of production cost: actual paid out cost (A2), actual paid out cost plus imputed value of family labour (A2+FL) and comprehensive cost (C2), which includes imputed rent and interest on owned land and capital. Of these three costing mechanisms, A2 is the lowest and C2 the highest. All along farmers have been demanding MSP to be set up at 1.5 times the C2 cost. This is also the key recommendation of M S Swaminathan commission on farmers.

The government has claimed that it has provided farmers with MSP at cost plus 50 per cent and hence the election promise has been fulfilled. But has the government given farmers MSP at 50 per cent over C2 cost? It has not. Except bajra which comes closest with 47 per cent returns over C2 cost, all other crops give a return ranging between 3 and 22 per cent. The MSP announced by the government is actually based on the cost at A2+FL formula plus 50 per cent and not at C2 cost. Therefore, the government’s claim of the MSP increase of being ‘historic’ is not true as the method of calculating MSP is the same as before.

Welcoming the MSP hike as the first step in the process of overcoming agrarian crisis, agriculture scientist Swaminathan has also pointed out to the government that the same is not based on C2 formula as cost of production. So, the question is: what will be the impact on farmers of the so-called ‘historic hike’ in MSP? The government announces MSP for most crops to set a benchmark. It however, does not procure all the agriculture produce. In reality, state agencies buy limited quantity of staples such as rice and wheat at MSP rates. This restricts the benefits of MSP, according to various reports and studies, to less than 10 per cent of India’s 263 million farmers.

Inadequate number of procurement agencies and programmes in many states also deprive farmers from seeking MSP benefits. According to the Commission for Agricultural Costs and Prices, in some of the rice producing states like Assam, West Bengal, Bihar, Tamil Nadu and Karnataka, procurement operations are very limited and hence the share of these states in procurement is very low. Barring a few states like Punjab, Andhra Pradesh, Chhattisgarh and Odisha, the procurement programme is almost missing in many states. Therefore, whether the MSP hike is ‘historic’ or modest, it does not make much difference to farmers who often end up selling their produce below MSP.

While MSP hike might address the vote bank ahead of the state elections and the 2019 Lok Sabha poll, it will not achieve much in addressing issues of agricultural productivity and the government’s stated goal of doubling farm income by 2022. The current MSP hike is expected to cost the government around Rs. 15,000 crore. But with the government’s finances under stress, it is likely to impact its fiscal math to the tune of 0.1 to 0.2 per cent of GDP. The move is expected widen fiscal deficit and lead to higher inflation in the range of 0.25 to 0.30 per cent. This might prompt the RBI to go for another rate hike in coming months.

The MSP hike announced by the government is reported to be around 20 to 25 per cent lower than the prevailing wholesale prices for many crops. Therefore, its impact on farmers’ income is unlikely to be much. It is also not the remedy for all the problems that plague the agriculture sector, though successive governments have used it as an instrument to woo farmers before elections.