Farmers work on paddy fields near Nuagaon, Jagatsinghpur District, Odisha India. (Prashanth Vishwanathan/Bloomberg News)

Author Of MSP Formula Says Real Solutions Lie Elsewhere


There has been a substantial increase in the minimum support prices for Kharif crops in 2018. There is also an interesting exchange of claims and controversy around it. The MSP is effective in what was sarcastically called a ‘single region single crop strategy’. This was a caricature of the strategy of supporting wheat and rice production and procurement in Punjab, Haryana, and western Uttar Pradesh. The Green Revolution was to spread and also the procurement operations, but the caricature had an element of core truth behind it. States outside the north-western belt did not always grow the dwarf varieties. Punjab also got into the Durum wheat. The Ludhiana Durum wheat largely had a private market, as did the Parmal basmati substitutes. But the states outside the north-Indian original green revolution belt first grew different quality grain, like the Durum Bhalia of Gujarat, the Kerala Red Rose rice or even the more popular Sharbati in Madhya Pradesh.

These were generally high-priced, more than the quality differential that the Commission for Agricultural Costs and Prices allowed, the Food Corporation of India purchased at, and were largely privately traded.

If prices slumped, the state governments would intervene but in a limited way, with limited funds, and with nowhere like the organisation that FCI has.

The agriculture issue has gained public attention as the terms of trade—which had risen in the first decade of this century after falling in the period after the Manmohan Singh liberalisation—were again moving against the farmer.

Since 2013, according to CACP, the fall in the terms of trade was around five percent.

So when everybody else’s income was rising, the farmer was losing out and was coming out on the road. We don’t have data on the terms of trade for the last two years, but according to most indications of price relatives, the farmer was not doing too well.

Farmers from Tamil Nadu sit on the ground with rope nooses tied around their necks, during a protest demanding farm loan waivers in New Delhi, India, on March 24, 2017. (Photographer: Prashanth Vishwanathan/Bloomberg)
Farmers from Tamil Nadu sit on the ground with rope nooses tied around their necks, during a protest demanding farm loan waivers in New Delhi, India, on March 24, 2017. (Photographer: Prashanth Vishwanathan/Bloomberg)

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

All this is well known. This year the twist was with the claim that ‘MSP would be 50 percent higher than the cost of production’. The increase in MSP announced was respectable. The increase in cereal crops, with some exceptions, was 15 to 20 percent higher than last year. Oilseeds were 13.42 percent and cotton 23.97 percent higher. Jowar, castor and sugarcane MSPs were marginally lower than last year. These are all good prices, taking into account that government has, for more than a decade, given bonuses on CACP recommendations. The novelty this year was the claim that a 50 percent increase in MSP has been provided over the cost of production.

The increase in MSP over the cost of production—measured as all paid-out expenses (A2) plus family labour (A2+FL)—was above 50 percent in the case of each Kharif crop. So, the NITI Aayog’s top officials – Rajiv Kumar and Ramesh Chand, are correct when they say that MSP is ‘fifty percent higher than paid out costs’. But MS Swaminathan is correct too, when he said that the increase ‘is below what was recommended’. The National Commission on Farmers led by Swaminathan had said that the MSP should be “at least 50 percent more than the weighted average cost of production.” This needs explanation.

At present, we follow estimates on the cost of production as recommended by a committee I had chaired. This committee went into the details of the cost of production by size class of farmers in terms of cost categories, relationship with output, productivity and cost components of crops like paddy and wheat in Punjab and cotton and sugarcane in Maharashtra. It showed its results based on farm-level data in tables and charts of which one example is below.

The big question is, should the support price cover only the paid-out costs or all the costs.

All costs would include the imputed values of owned land, imputed interest on own capital, imputed value of family labour and imputed remuneration for the management function of the farmer.

Specific difficulties arise and questions are raised on the imputation of the values of farmers’ own resources. As regards the management input of the farmer, some argue that the return to management is determined by the profit and as such, it should not be made a part of the cost. The committee which the government follows had noted that currently, the cost concepts used by the Directorate of Economics and Statistics in the Ministry of Agriculture and CACP include all these costs such as A2, C2, C2* and C3. It recommended that the CACP should continue to take into consideration all these cost concepts while formulating its recommendations on the level of MSPs.

The NITI Aayog economists’ argument that rental and interest imputations on capital costs should not be incorporated in MSPs as was recommended by the Swaminathan Committee, leaves much to be desired. Rental incomes, it is correctly argued, are unearned incomes as defined in Ricardian economic theory. But we don’t follow these principles in setting tax or tariff policies for non-agricultural goods.

If unearned surpluses are garnered by non-industrial corporate sector entities, it is somewhat churlish to deny them to the farmer.

The Price Fixing Rules provide that, according to the existing practice, DES applies a normative rate of interest at 12.5 percent on working capital and 10.0 percent on the fixed capital. Considering that a large proportion of farmers resort to non-institutional loans from sources like moneylenders, a higher rate of interest should be provided.

The case for including actual interest costs seems quite clear. But it seems very unlikely that there will be policy coordination between agricultural price policy and tariff policies to protect the efficient Indian farmer. Getting players like Walmart to buy farmers’ produce and give them space in its warehouses is far more important, but simultaneously we are told that this is slowed down because of the influential trader lobby. In pulses, vegetables and fruits, and milk and milk products—where demand is rising fast and which drives food and agri inflation—the infrastructure has yet to be built.

A porter stands next to goods at a wholesale vegetable market in Dharamsala, India. (Photographer: Sara Hylton/Bloomberg)
A porter stands next to goods at a wholesale vegetable market in Dharamsala, India. (Photographer: Sara Hylton/Bloomberg)

Also read: The Challenges Of Procurement At MSP

The 150 percent business is a ‘no-brainer’ and is taking away policy focus from more important areas of infrastructure and credit provision. Policy coordination is always easy in a textbook, but normal persons don’t like to give up power. Only the exceptional become more powerful by shedding power and coordinating for the larger good. Another reason could be a fear of rule-based systems. For then, you are not seen as the benefactor and this can be important in pre-election periods. There are real problems.

To have MSPs and, separately, free imports, is like pouring water in a leaking bucket.

India did this at great cost a few years ago in the grain crisis period.

Finally, there could be the fear of the unknown, but that goes into uncharted territory. After the dithering of the 1990s, we are doing a superb job in the WTO. Having accepted a trade-dominated regime we will finally accept the challenge of the rational transition to it. The friendly ghost of the Alagh Committee, which developed the rules we discussed, will keep on coming back and will be exorcised only when we are fully competitive in our agriculture. It has already surfaced with the Bharat Krishak Samaj making this an election issue, as also the Consortium of Farmers Organizations taking it up. But we are now going beyond the economics of MSP into areas beyond our competence.

Until then, enjoy a hundred and fifty percent, whatever it means. But let’s not scoff at the MSP rise. It is a good thing after all the drama.

Yoginder K Alagh, an economist and former union minister, chaired the Expert Committee to Examine Methodological Issues in Fixing MSP.

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