Farm prosperity. Why not an inflation-based MSP regime?

The green revolution-led bumper crop production especially of rice and wheat during the late 1960s had led to the introduction of Minimum Support Price (MSP) policy in 1967. MSP’s twin objectives were — assuring income security to farmers and providing food security to consumers especially poor. MSP contributed immensely to achieve these goals, particularly until mid-1990s.

MSP, an issue since 2014

There are five economic and technical reasons why farmers are raising their voices over MSP.

Firstly, farmers had many expectations from the new government after 2014 due to the promises made by the BJP during its election campaign. One of the promises was to implement the recommendations of Dr. M.S. Swaminathan’s national farmers’ commission, regarding MSP — MSP would be 50 per cent higher than the cost of production.

So farmers expected a big jump in MSP of crops.

However, the MSP hikes post 2014 have been much lesser than the period preceding that, leading to discontent among farmers.

The MSP of paddy more than doubled between 2007-08 and 2013-14, while it rose by only 48 per cent between 2013-14 and 2021-22. Similar trends were noticed for major crops during these periods (pre and post 2014).

Going by the Swaminathan panel’s recommendation, farmers argue that the MSP hike post-2014 should have been much higher.

Farmers’ leaders have been arguing as to why incremental increase in MSP of many crops between 2013-14 and 2021-22 was only half of what it was prior to 2014, when MSP is fixed at 50 per cent higher than the cost of production?

Secondly, there has also been controversy over methodology for calculation of cost of production after 2014. Among several determinants, cost of production is a key factor for fixation of MSP by Commission for Agricultural Costs and Prices (CACP).

According to Swaminathan panel’s recommendations in 2006, MSP ought to be fixed at 50 per cent higher than the C-3 cost production. C-3 includes all cash input costs, depreciation, interest on working capital, imputed value of owned family labour, imputed or actual rental value of land, interest on fixed capital, and 10 per cent of sum of these costs as farmer’s managerial charges.

Though the government claimed that the MSP of major crops was 50 per cent more than cost of production, two important factors — interest on fixed capital and charges towards farmer’s managerial services — were taken out of the calculation. Further actual rental value of land was also limited to a ceiling.

Therefore, cost of production figures were underestimated with the modified method of calculations, and as a result of change in methodology, the new cost of production estimate was lowered by nearly 20- 25 per cent, as compared to prior to 2014.

Had the government continued with the methodology that was used before 2014, then the present MSP could have would been 30-35 per cent higher than what it is fixed for 2021-22.

Thirdly, there was a substantial increase in cost of production after 2014, due to a significant rise in key input prices. Prices of key chemical fertilisers such as Urea and DAP nearly doubled, and nominal wages of farm labourers also doubled between 2014 and 2021.

The hiring charges of farm machinery also more than doubled mainly due to hike in fuel prices.

Thus, actual cost of production at current prices has increased at about 8-10 per cent per year on an average after 2014.

The fourth reason is near stagnation of yields of major cops in the recent years. Paddy yield increased at an average rate of about one per cent per year while there was almost no change in cotton after 2014. However, wheat yield has increased at an average annual rate of 2.5 per cent.

Given these cost and yield factors, the only way to boost farm incomes is through increasing MSP ‘at least above inflation rate’ besides covering additional production costs in a year.

The final factor that worsened the farmers’ condition is MSP hike not keeping pace with inflation.

The average annual rate of increase in MSP of many crops at current prices was similar to the average annual retail inflation rate between 2014 and 2021. So, there is no real increase in crop income of the farmers through MSP after 2014, as MSP hikes were eaten away by inflation.

Furthermore, if cost-push effect and the meagre increase in crop yield are adjusted with increase in MSP against inflation rate, the real crop income of farmers might have even declined after 2014. On the other hand, in the 2007-08 to 2013-14 period, despite the average annual inflation rate (8.57 per cent) was higher than the that of 2014-2021 period (4.84 per cent), the average annual MSP increase of many crops was much higher than inflation rate during the 2014-2021 period.

Need for a new formula

In view of growing farmers’ concerns over recent trends in MSP and modified methodology, it is essential to bring more transparency in MSP fixation through a new formula. There are two ways to do this for restoring farmers’ confidence in the system. Firstly, the government can replace the present complicated cost of production-based MSP fixation with inflation-based MSP fixation formula. The inflation rate, based on year-to-year changes in consumer price indices, is a key to decide on the increase in any income related indicators such as dearness allowance (DA) for employees, pay revision, wage revision etc.

The government may introduce inflation based new economic formula for MSP fixation to ensure real income security of the farmers through MSP on par with the rest of workers.

Accordingly, the responsibility for fixation of MSP under the new formula may be transferred to the Ministry of Finance.

Also as demanded by the farmers’ leaders, the proposed inflation-based new economic formula for MSP fixation along with its new detailed methodology may be granted with legislative sanctity through a MSP Act in Parliament.

This would be a big revolutionary change in overall MSP policy after its introduction in 1967.

The writer is an Agricultural Economist in Hyderabad. Views expressed are personal

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