Farmers see through false promise of MSP hike

Despite the song and drama over 'fulfilling' its promise of providing 50 per cent profit over the cost of production, the government has actually manipulated the formula that measures the production cost. In a way, it has changed the very goal post of the pricing structure to arrive at a very convenient estimate by reducing the cost a farmer incurs.

Farmers see through false promise of MSP hike

The timing is perfect. Coming a year before the next general elections, the announcement of a higher procurement price for 14 kharif crops has sounded the election bugle. While the debate whether the increase in farm prices by an average of 50 per cent over the production expenses that farmers incur, actually meets the commitment that Prime Minister Narendra Modi had repeatedly made during the 2014 election campaigns will continue, the ruling BJP will now claim credit for it at every platform. How much of it will stick with farmers, who know where the shoe pinches; only time will tell.

The same government had a few years ago backed down from its promise of providing 50 per cent profit over the comprehensive cost (called C2) as per the recommendations of the Swaminathan Commission. It had stated before the Supreme Court that it was not possible to do so as it would 'distort markets'. Now, it seems the government has been hit by the realisation that denying a higher price will be politically suicidal.

Now the decision to enhance the procurement has come in as a shot in the arm for a section of the beleaguered farming community. Even though the procurement prices announced are far less than what farmers had been demanding all these years, it is a step in the right direction.

It has to be followed with the laying out of adequate infrastructure for building procurement for all crops, which is clearly not visible so far. Nor is there anything 'historic' since the increase in minimum support price (MSP) for some farm commodities has been higher in the past than what has been announced.

Despite the song and drama over 'fulfilling' its promise of providing 50 per cent profit over the cost of production, the government has actually manipulated the formula that measures the production cost. In a way, it has changed the very goal post of the pricing structure to arrive at a very convenient estimate by reducing the cost a farmer incurs. Against the comprehensive cost estimate, which includes interest over capital investment and the rental value of own land, the government has lowered the estimate by only taking into account the amount paid out by farmers (A2) and adding the family labour cost (A2+FL). What it means is that instead of adding 50 per cent profit over C2 cost, it has only provided 50 per cent profit over A2+FL. In other words, instead of raising the bridge, it has actually lowered the river.


Take the case of paddy. Against last year's price of Rs 1,550 per quintal for the common grade, the price announced this year is Rs 1,750 per quintal, a jump of Rs 200. This certainly includes a profit margin of 50 per cent over the A2+FL cost which has been worked out at Rs 1,166 per quintal by the Commission for Agricultural Costs and Prices (CACP). But this is not what the farmers had been demanding. Their demand has been for 50 per cent profit over C2 cost, which is what the Swaminathan Commission had recommended.

Let us look at what the demand for C2 cost plus profit would translate into. The CACP has computed the C2 cost at Rs 1,560 per quintal, and adding 50 per cent profit to it, would mean the paddy procurement price should be Rs 2,340 per quintal. Compared with the C2 cost, farmers are at a loss for Rs 590 on every quintal sold.

Similarly, for maize, the A2+FL price has been calculated at Rs 1,131 per quintal. Adding 50 per cent profit, the MSP for maize has been fixed at Rs 1,700 per quintal. But the comprehensive cost of production (C2) of maize is Rs 1,480 per quintal, which means the MSP for maize as per the Swaminathan Commission should have been Rs 2,240 per quintal, a clear loss of Rs 540 per quintal for farmers.

Niti Aayog justifies the new costing formula saying it is impractical to add rental land value to the farmer's price because the land value differs from place to place. But this is not an acceptable argument considering that like other components of the cost of cultivation, which too vary from State to State, an average land value could have been taken to arrive at the C2 cost. In any case, CACP does work out the C2 cost and I see no reason why Niti Aayog should find fault with it.

All efforts to project A2+FL as the new base for measuring farm prices in future stems from the contempt policymakers carry for the agrarian economy. Agriculture is considered a drag on the national economy and has been deliberately kept impoverished over the past few decades. The idea is to push farmers out of agriculture to migrate to the cities, which are in need of cheaper labour. In other words, agriculture is being sacrificed to keep economic reforms alive. Moreover, the general belief is that more prices to farmers would lead to a higher food inflation, which eventually pulls down economic growth besides leading to consumer protests. The entire burden of keeping the urban consumers happy is being very conveniently passed to farmers. Agriculture, therefore, is a victim of the economic design.

While addressing a press conference in New Delhi to announce the Cabinet decision on farm prices, Home Minister Rajnath Singh had stated that the higher MSP for kharif crops will entail an extra expenditure of Rs 15,000-crore. No sooner did he say this, mainline economists and economic analysts have begun to question where will the money come from. The political compulsion to raise MSP will lead to fiscal indiscipline, thereby making it difficult for the Finance Minister to keep within the prescribed fiscal deficit limits, is another question being asked.

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When the 7th Pay Commission was announced, the Finance Minister said it would entail an additional expenditure of Rs 1.02 lakh crore every year benefitting 45 lakh central government employees and 50 lakh pensioners. No one asked where the money will come from nor the question of widening fiscal deficit was ever raised. A Credit Suisse bank study estimated the additional financial burden to soar to anything between Rs 4.50 to Rs 4.80 lakh crores every year when the Pay Commission report is implemented across States. Again, I didn't see any economist question where will the money come from. Nor did anyone work out the impact higher wages would have on inflation. The question of where will the money come for providing a higher price to farmers, therefore, is a reflection of a biased mindset. No wonder, farmers have been denied their rightful income all these years as a result of which indebtedness had mounted thereby aggravating the agrarian crisis.

Claims notwithstanding, the hike in MSP for kharif crops will benefit not more than 6 per cent of the farming community. As per the high-level Shanta Kumar committee, only 6 per cent farmers receive MSP. Since a well-oiled marketing infrastructure exists for procuring rice and wheat in Punjab and Haryana, farmers from these two states will be the main beneficiaries of the enhanced paddy price. For the rest of the kharif crops, the announcement of 1.5 times the MSP will not mean much since the States do not have adequate procurement system in place. Like in the case of pulses, for which the government had announced a higher price for two years now, the actual procurement has been far less. In the absence of official purchase, farmers were forced to sell at a distress price varying between 25 to 40 per cent.


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The commitment to extend MSP to all crops for which prices are computed will be meaningless till adequate investments are made in expanding marketing infrastructure. Against roughly 7,600 regulated mandis that exist now, the country needs 42,000 mandis to provide market access in 5 km radius.

Moreover, the hike in procurement prices comes at a time when global commodity prices are on the decline. It comes at a time when an OECD -FAO report released last week has pointed to a still more troublesome period ahead for farmers. Global prices in cereals, cotton and milk will remain depressed in the next decade too. Already, milk prices have prevailed at a low level for the past 4 years resulting in the closure of thousands of dairy farms in the US and Europe. More than 17,000 dairy units have pulled down shutters in the US in the past decade, and in the last three years at least 3,000 dairy farms have closed down in the European Union. Even the most efficient dairy farmers in New Zealand are not able to realise a remunerative price. In India too, the dairy sector is in a serious crisis and milk prices have crashed in Maharashtra where milk is selling cheaper than bottled water.


In such a global scenario, and with the World Trade Organisation (WTO) breathing down India's neck seeking a cap on public stockholding of food, the promise of providing a higher MSP to farmers may not last long. For all practical purposes, it may remain an empty promise. Farmer movements too have to understand this. The time has come to move away from price policy to income policy.

I have time and again emphasised on the need to provide farmers with an assured monthly income, which is not only WTO compatible but also provides economic security to farmers. The demand should be to convert the CACP into a Commission for Farmers Income and Welfare with the mandate to assure a monthly living income of at least Rs 18,000 per farm family. That will be the beginning of Sabka Saath, Sabka Vikas.#

(The author is a well-known food and investment policy analyst, this is his personal opinion. His Twitter handle is @Devinder_Sharma click here to read all his articles.)

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