A worker checks the quality of wheat outside a trader’s store at a grain market in India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Can Higher MSPs Do The Trick? For Farmers, And The BJP.

BloombergQuintOpinion

With elections due this and next year, the National Democratic Alliance government has decided to belatedly match its professed commitment to the farming community with some action. It has raised the official minimum support prices for a range of crops to be cultivated this Kharif season by a substantial margin, adopting the principle that MSPs have to be set at 1.5 times the cost of production, calculated taking account of all paid out costs and the imputed cost of family labour (classified as A2+FL).

The price at which the government now promises to procure the common variety of paddy, for example, has been raised from Rs 1,550 per quintal to Rs 1,750, an increase far higher than most previous seasons, and definitely in years when NDA governments have ruled. Similar increases have been announced for other Kharif season crops that fall within the ambit of the government support price policy. Official spokespersons of the government and the BJP have claimed that this would substantially enhance farmers’ incomes.

Even ignoring the cynical end-of-term and pre-election timing of the announcement, there are many grounds to argue that it may amount to little more than mere rhetoric, and would not reach significantly higher long-term benefits to the farming community.

The first of these grounds, which many farmers’ representatives have been quick to flag, is that the claim that the government’s decision implements the recommendation of the National Commission on Farmers headed by MS Swaminathan does not hold. Swaminathan has made clear that the commission had recommended minimum support prices set at 50 percent over and above the cost of production classified as ‘C2’ by the Commission for Agricultural Costs and Prices. This is the ‘comprehensive cost’ including imputed rent and interest on owned land and capital, and not just the ‘A2+FL’, which takes account only of actually paid out cost plus the imputed value of family labour.

Very clearly, sensing the need for productivity-enhancing and land-augmenting technical improvements, the commission wanted the government to ensure that investments in such technologies were encouraged through prices for the produce, that not only covered current costs but provided farmers with the means and the incentive to undertake such investments. Since the government too claims to be committed to doubling farmers income by 2022, the adoption of the commission’s recommendation in full was definitely warranted.

By sticking to A2+FL costs the government has raised prices only to levels where they stand at between 20 and 30 percent below C2 cost in the case of almost all Kharif crops.
A farm worker holds a bundle of cut rice during a crop harvest in paddy fields near Thimmapuram, Tamil Nadu, India. (Photographer: Prashanth Vishwanathan/Bloomberg)
A farm worker holds a bundle of cut rice during a crop harvest in paddy fields near Thimmapuram, Tamil Nadu, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Also read: Government Committed To Agri Sector Growth, PM Modi On MSP Hike

But that is not all. Even to the extent that the government, worried by recent farmers’ movements, has promised to go part of the way in meeting their demand on prices, the benefits may reach only some farmers. One reason is that the A2+FL costs calculated by the CACP are a single average figure for each crop for the country as a whole. Given the wide variation in productivity and costs of production inevitable across the country, there would be many farmers who do not get as much the government is claiming it is offering them.

Arguing that low productivity production should not be rewarded with higher prices does not help. Productivity is low because governments over the years have neglected agriculture and invested inadequately in irrigation, drainage, flood control and extension services. And the low prices offered to farmers in the past did not offer them incentives to invest in productivity-enhancing technologies.

A second factor that could leave farmers disappointed is the possibility that while higher MSPs have been announced, procurement can go down. 

To deliver the promised incomes to the farmers the government has to provide for substantially higher expenditures to support agriculture. In the first instance, higher expenditures are likely because prices of products procured are going up since input and energy costs are rising because of deregulation of prices and withdrawal of subsidies and an additional 50 percent has been promised on that rising base.

Higher MSPs would also encourage more produce to be delivered to government procurement centres rather than the open market. So the volume of procurement and outlays for the same should rise. A large part of this increased expenditure would be for food crops. Since government would be under pressure not to raise prices on food supplied through the public distribution system by as much as the increase in procurement prices, as that would hurt consumers who are also voters, the subsidy bill needed to cover the difference between PDS prices and the procurement price plus storage and transportation costs would rise.

To the extent that prices of food supplied through the public distribution system are raised to cover higher ‘economic costs’, offtake from that system could stagnate or decline, increasing the volume and costs of storage and losses in storage, which must be paid for.
Farmers and traders gather for the auction of mustard seeds at a wholesale grain market in Rewari, Haryana, India, on March 28, 2018. (Photographer: Anindito Mukherjee/Bloomberg)
Farmers and traders gather for the auction of mustard seeds at a wholesale grain market in Rewari, Haryana, India, on March 28, 2018. (Photographer: Anindito Mukherjee/Bloomberg)

Also read: The Roots Of The Agrarian Distress In India

While all these factors imply that the MSP decision would substantially raise public expenditure, the government has diminished its ability to enhance expenditures because of its commitment to a 3 percent fiscal deficit and zero percent revenue deficit at a time when tax revenue growth is moderate. With current fiscal deficit targets themselves dependent on large receipts from disinvestment, non-tax revenues cannot help cover the increased expenditures. In the circumstances, the government has only one option. Pay the higher prices but procure much less. With many state governments under its tutelage, this should be easy to implement.

Where state governments decide to procure more than the centre is willing to accept, allocations will be capped and the states left to their own devices.

That reduced procurement is a real possibility is clear from experience. If the government delivers on the promise implicit in the MSP that it would buy any amount farmers want to sell to it at that price, open market sales by farmers would occur only at prices higher than that offered by government procurement agencies. But there have been a number of occasions in the recent past and earlier when open market prices ruled below the MSPs. Unable to sell their produce to the government, farmers turn to the open market and sell at lower prices especially in reasonably good harvest years.

Given the inadequacy of the government’s ‘new’ price policy and the likelihood that it would not be fully implemented in its current form, farmers would not receive the benefits that even the Prime Minister had promised them, as for example in his speech at the Krishi Unnati Mela 2018. In the event, the government’s expectation that its rhetoric would win it farmer votes in the coming elections may also be belied.

CP Chandrasekhar is Professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.