Story Of The Week

Minimum Support Price- Is The Support Enough?

“To make agriculture sustainable, the grower has got to be able to make a profit

– Sam Farr

They say that Farming is a risky business, but with eternal demand in an industry, is this possible?

Well, a lot of factors are at play. As per the Economic Survey of 2018, some of the primary reasons include inadequate market infrastructure, excessive profiteering by the middlemen and lower than the remunerative pricing of the commodity in this industry. These factors severely affect the farmer’s interests and capabilities to stay put in the concerned profession.

In such situations, government intervention usually provides leverage to the farmers whereby socially optimal prices, which are above the market prices are set. This helps in keeping up the farmer’s confidence in this business. This price is referred to as ‘Minimum Support Price’. If the market price falls below these minimum support prices, Government steps in to procure the produce via Public Distribution System. An example of the price floor mechanism, MSPs are usually a function of the cost of production incurred by the farmers.  For instance, the Finance Ministry has decided to procure twenty-three notified crops at 1.5 times the input cost as per the Union Budget for the running fiscal year.

Recently, Narendra Modi led BJP Government announced a hike in the price of Paddy by Rs.200 per quintal to Rs.1750 per quintal in order to abide by the said promises mentioned under the Union Budget’18. The move came a year before the general elections.

But When and Why MSP?

Pre-Green Revolution witnessed the conceptualization of a price support system for the first time while the implementation of it took place during the period itself. Finally in 1965, on the recommendations of ‘Jha committee’, Agricultural Price Commission (APC) was set up which was responsible for providing suggestions for the appropriate price range for MSP. In 1985, APC was transformed to Commission for Agricultural Costs and Prices (CAPC).

However, the groundwork for the entire concept of MSP was laid to fulfill a three-fold agenda:

  1. MSP mechanism was aimed to ensure an efficient distribution of grains from food surplus areas to food scarce ones.
  2. Through Public Distribution System – a complementary initiative of this mechanism, the demand side of the market was being sought through, as it aimed at providing reasonable prices to the consumers.
  3. Farm incentive to farmers was provided to counter exogeneity and uncertainty in the concerned business.

An Exception To The Mechanism: Sugarcane

The evolution of price mechanism in the Sugarcane industry has been fairly gradual. Sugarcane control order 1966 (amendment 2009), introduced (FRP) Fair and Remunerative Price policy as a replacement to the conventional Statutory Minimum Price. Under the FRP scheme, sugarcane mills were obligated to pay 70% of the total turnover to the farmers, if sugar turnover was considered for an imputed cost. However, accumulation of arrears of cane dues during inflationary periods led to biased scenarios. C. Rangarajan Committee was set up as the recommending authority on October 12, 2013.

The committee recommended the Government to scrap off the idea of FRP and a new methodology, based on profit sharing policy was introduced whereby farmers have also been entitled a share in the final profits.

 Viability In Question

  1. SKEWED PRODUCTION

The price range offered for Wheat and Rice is relatively higher as compared to the other crops. This led to biased production norms among the community as farmers are indirectly disincentive to grow other crops.

The spiral effects cause even more distortion in the market. On one hand, the surplus of Wheat and Rice in the market augments the gap between the market price and MSP, while on the other hand, production incentives for other crops also get negatively affected.

  1. BUFFER STOCK IS THE NEW BLACK HOLE

Excessive procurement of foodgrains by FCI beyond their infrastructural constraint leads to unsheltered storage and transportation of these food crops. A massive amount of grain is lost during the course of action. Thus, continuous piling up in Government’s buffer stock, questions the viability of the entire mechanism.

  1. INFLATIONARY PRESSURE

Dynamic norms in terms of food preferences have led to Food price inflation in the economy. With a rise in demand for protein-rich food alongside a simultaneous shortage in supply due to diversion in production, food prices have been rising since the past decade.

  1. FISCAL IMBALANCE

Rising MSPs are a toll on Government’s bills. With constant revenue and accelerating bills, public expenditure capabilities of Government gets negatively impacted. This creates a fiscal imbalance in the financial statements of Government.

Recent Changes In MSP

An increase of 40-50% in the MSP of coarse grains which are cultivated by the poorest farmers is done, majorly in Rajasthan and other un-irrigated areas. The major idea is to incur all the costs to the farmers which he/she has put in the cultivation of that crop along with an income for them. Many crops have seen increased MSPs with pulses leading the lot.

After the announcement of MSP hike by the government during the budget allocation many of the farmer organizations revolted against the same saying, it was a trap and that the definition set by the government for the cost incurred was not actual. After two months of the debate between what is the correct MSP and the cost incurred, the farmers were finally struggling to achieve even the stated MSP(s). So the major loophole was that the price promised by the government itself could not be procured. A mere 10% of the total MSP promised could be procured in 29 out of 45 crops listed.

Need for Hike

In the latest estimation by Situation Assessment Survey of Agricultural Household, it was found that only average of 6426 comes to the household of an Indian farmer, while average monthly expenditure was found to be 6223. This was inclusive of net revenues from crop cultivation, animal husbandry, monthly wages and other subsidiary businesses. This figure evidently showed that the entire income was spent in the household expenditure, thus leading to endless woes for the countrymen and this was disturbing in the wake of the government’s manifesto of doubling farmers income by 2022. This led to the urgent need of providing farmers with higher returns from the produce to increase their real income so as to boost their purchasing capacity and shield them from inflationary distress.

Matter of Definition

Here lies the loophole. The government has only considered (A2+ FL ) as the production cost excluding land cost, instead of  C2 (Comprehensive Cost )for the MSP hike as in the latter case it would have been far more remunerative for the producers.

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The following table clearly the gap between promised(A2+FL+50% and calculated MSP(C2+ 50%) for the majority of kharif crops and the amount they lose upon this matter of definitions for MSP, thus leading to another political warfare between GOI and the opposition parties.

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Source –The Hindu

Twist in the Tale

This hike in MSP of Rabi and Kharif crops for supporting farmers with prices that are one and a half times of the production costs has another political angle to it. Keeping up with practices or let’s say malpractices of previous governments, this government has also chosen the penultimate year out of all the five years of its tenure in its governance before the Lok-Sabha elections to significantly increase the support-prices to instantly please the farmer , making it looks more like a vote bank stunt, even though this hike  is likely to inflate the food subsidy bill by thousands of crores and is expected to higher inflation and widening fiscal deficit.

Conclusion

This historic rise in the support prices are higher than any other hikes in the previous years, in absolute terms and there has been a mixed response from the farmer’s community. Its execution though wholly depends upon the way how procurement supports this move. From a farmer’s point of view now it is up to them whether they sell their crops at MSP or in the market and only time can tell about the success of this policy initiative and the real relief it will be providing to the countrymen.

References

  1. https://economictimes.indiatimes.com/news/economy/indicators/how-msp-hike-will-impact-on-indian-economy/articleshow/64857535.cms
  2. https://www.thehindu.com/business/agri-business/msp-definition/article24370556.ece
  3. https://indianexpress.com/about/minimum-support-price/
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