The Hindu Business Line : Time to revise the MSP formula

With international prices collapsing, this is the right time to devise a realistic MSP formula that makes up for the omission of the risk factor as well as the massive subsidies to farmers in OECD countries.

Sharad Joshi

In March 2008, when there was a big row over inflation and increasing cost of living, the Government resorted to a knee-jerk reaction by importing edible oil, and banning both the export of non-basmati rice as well as trading in several commodities on the futures market — measures meant only to depress agriculture prices.

Since then, a general recession has set in, cutting across borders. Crude oil prices have fallen from $147 a barrel to less than $45. And inflation has come down to around 8 per cent.

There is a flurry to inject greater liquidity into the economy by slashing interest rates and making housing loans cheaper. One would have expected that the Government would now turn to policies that will make farming more viable. The reality though, is quite the opposite.

Farmers in Punjab, for instance, encouraged by the bullish crop price signals, responded enthusiastically by increasing the production as also the acreage. Their hopes have been belied. Last year, farmers had marketed their un-ginned cotton at Rs 2,100-2,600 a quintal. The general expectation was that in the 2008-09 season, the prices will be above Rs 3,000 a quintal. Traders came to the villages offering advances to secure deals even before the crop had flowered. It seemed that there was increasing demand for Indian cotton because of failure of the crop in key producer countries.

But, along with the financial crisis the commodity markets too collapsed. The consequence is that farmers are selling the crop now at Rs 2,600-2,700 a quintal, as against the MSP (minimum support price) of Rs 2,800. When the prices were rising the Government ensured that agricultural prices were depressed. But when international prices have collapsed, the Government is hesitant to help the farmers.

The MSP, in principle, is supposed to cover at least the cost of cultivation. Now, in the case of cotton, the concept of MSP has lost all its relevance as there exist two distinct categories of cotton growers.

Computing MSP

In certain States, of course, the farmers are able to obtain even the minimum support price. This is true for example in Maharashtra where the government is committed to procurement of cotton at the minimum support price.

Those who produce traditional varieties, particularly in rain-fed conditions, have low yields and incur higher costs. And others who had taken to the Bt varieties and having some kind of a protective irrigation, have managed yields that are often 5-10 times higher and with lower cultivation costs.

The Cotton Association of India (CAI) came forward expressing its apprehensions over the hike in the MSP for 2008-09. The CBOT (Chicago Board of Trade) prices had collapsed as a result of the financial crisis, a little after the MSP was announced. The textile mill magnates, as also the handloom owners, came out strongly against the MSP which, for once, happened to be higher than the international prices.

The matter was considered so important that the Prime Minister called for an emergency meeting of the parties concerned with a view to offering sops to the industry at the cost of the farmers. Fortunately, there was no move to reduce the MSP for cotton.

In the light of the recession in the global commodity markets, steps are now being taken to modify the very methodology of calculating the MSP as also the procurement prices, but to the detriment of the farmers.

Dr M. S. Swaminathan had recommended that the cost of production figures should be enhanced by 50 per cent to arrive at the MSP. But he gave no clarification as to how he arrived at that figure.

Include risk factor

The farmers’ movement has been demanding, since the early 1980s, that the computation of the MSP should take into account the coefficient of risk in agriculture. Rao Birendra Singh had admitted, as early as the 1980s, that the Agriculture Prices Commission did not take into account the risk factor.

Empirical studies show that the risk factor in Indian agriculture, which has very low capital intensity, is not less than 40 per cent. Had the figure of cost of production been majorated by around 40 per cent, the farmer would have been able to pay an actuarial premium for a scientific crop insurance scheme. However, the Government persisted with crop insurance schemes carrying ridiculously low premium rates of around 2-5 per cent.

That rate of premia could not ever meet the claims made on account of crop losses and the Government was obliged to make up for the difference by making allocations from budgetary resources.

Now that the global agri commodity markets are in a crisis, the worst sufferers are going to be Indian rather than OECD farmers. This is because, unlike the OECD farmers who have been receiving hefty ‘positive’ subsidies, Indian farmers have been labouring under a system of ‘negative’ subsidies. The Government should have seized this opportunity to include the risk factor for calculating the MSP. This would have also partially made up for the massive OECD subsidies.

The APC as it was established in the 1960s, worked well till 1970. This was the period in which the wheat and the paddy farmers of Punjab and Haryana received good incomes, which in turn led to a massive creation of a number of small and medium industries in those States.

Since the 1970s, there has been a succession of chairmen of the APC and its successor, the CACP (Commission For Agricultural Costs And Prices), who have been opposed to inclusion of family labour and argued about the rate at which it should be computed. They also opposed the computation of the replenishment costs of the agricultural land. Till date, the risk factor has not been included in the cost calculations.

C2 costs

The Government is now inclined to accept a recommendation made in mid-2002 by a committee chaired by one of the later chairmen of the CACP and a Member (Agriculture) of the Planning Commission, Dr Abhijit Sen – that in crops such as wheat and paddy the MSP should be equal to the C2 costs.

This would, in fact, mean that the present MSP will be frozen at the 2006 levels. The C2 costs are limited to include only the actual expenses incurred in cash and in kind by the farmer, plus interest on value of owned capital assets excluding land, rental value of land and imputed value of family labour.

This indeed is an outrage. As the prices were going up, the farmers were punished by over-regulating the commodity markets. Now that the international prices are collapsing, the time is right to invent a formula, not to reduce the MSP but to make up for the past mistakes of omission of the risk factor as also for the massive subsidies given to farmers in OECD countries.

The Government is doing exactly the opposite. It is withdrawing from the farmers, in a period of recession, the concept of comprehensive costs of production and replacing it with C2 costs for computing MSP.

(The author is Founder, Shetkari Sanghatana and Member of Parliament, Rajya Sabha. blfeedback@thehindu.co.in)

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