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Will A Revised MSP Provide the Much Needed Fillip To Agriculture in India?

Product Manager with 6+ years of experience in building consumer facing technology products.
Sep 18, 2018 11:25 AM 8 min read

One of the poster worthy targets of the present government that has been recently announced is its intention to “double the income of farmers by 2022”. A number of schemes and policies have been put in place to make this happen - one among them is a commitment to increase the Minimum Support Price (MSP) so that farmers get a 50% return over cost. On paper, these are extremely good initiatives. However, I personally am wary of any generalizations.


In the particular case of ‘providing a return of 50% over cost to farmers’, a number of questions immediately pop up in my head. How is the cost for farmers calculated - i.e. what are the inputs that are included? As a farmer, if I produce any crop in any amount, does the MSP policy guarantee that I will be able to sell all of it at a 50% margin? Who decides the MSP and how do I as a farmer sell at MSP?


An increase in MSP is not going to solve a lot because it is an imperfect system.


This is probably a good time to repeat the purpose of this column. This column is not written by an expert - far from it. My day job is as far away from the world of policy and government as it could be. But that is exactly the point. Those of you reading this are probably in a similar position - and yet want to understand what exactly is happening at a broad level in our polity. Is the government following through with its policies? What impact does something happening in far away Delhi have on your life? How can you become an informed citizen?


I have a tenet: In a world with all the answers, the trick is to ask the right questions. That is the purpose of this column - take an issue, deconstruct it, and ask the right questions. I will try my best to point you in the general direction of the answer, but it is unlikely is that going to be the complete picture, largely because these are complex and temporal issues, changing day by day. However the hope is that the next time you come across someone talking about MSP and the government’s efforts for farmers, you will keep this background in mind, and ask the right questions.


Will A Revised MSP Provide the Much Needed Fillip To Agriculture in India? 

What is the Minimum Support Price?


It is a price at which the government “guarantees” that it will purchase “certain crops” from the farmer. It is primarily to ensure that farmers are not pushed to do a distress sale of produce in years of excess production. The MSP is typically below the market price, so it essentially sets a floor price for crops. It also ensures food security, since a large percentage of the procurement is towards distribution via the PDS (Public Distribution System aka ration shops).


Who Decides the MSP?


The Committee for Agricultural Costs and Prices (CACP) in the Central Government’s Ministry of Agriculture recommends prices based on a set of factors. The final decision to set the MSPs is taken by the Cabinet Committee on Economic Affairs (CCEA) - one of the highest executive bodies in India, which includes the PM and the FM. The recommendations of the CACP to the CCEA are based on a number of factors, including input price, estimated demand and supply of the crop, international price movements, price levels of different crops, effect of the MSP on market conditions and so on. Details from the CACP website here.


When is the MSP Announced?


It is announced generally at the beginning of the crop sowing season, and gives farmers indications on the capacity of the government to buy what they produce.


Is the MSP Valid For All Crops?


No, it is not. There is a set of 23 crops for which MSP is recommended by the CACP. As of now, CACP recommends MSPs of 23 commodities, which comprise 7 cereals (paddy, wheat, maize, sorghum, pearl millet, barley and ragi), 5 pulses (gram, tur, moong, urad, lentil), 7 oilseeds (groundnut, rapeseed-mustard, soyabean, seasmum, sunflower, safflower, nigerseed), and 4 commercial crops (copra, sugarcane, cotton and raw jute).


How is MSP Calculated?


To answer this question we will have to dive into what the government considers as ‘cost of production’. There are three broad classifications of the cost given by the CACP - A2, A2 + FL, and C2. The difference between the 3 classifications is the variables that are considered to be inputs to each.


A2 - All costs actually paid out by the farmer - including costs of seeds, fertilizers, hired labour, fuel, irrigation etc.


A2 + FL - This includes everything in A2 and also includes the cost of family labour, considering that farming in India is largely a household activity where members of the family actually till the land and use their time. This measure adds a cost of this time to the cost of production as well.


C2 - This is called the comprehensive cost. It includes everything in the above two measures and also adds assumed rents for owned land and machinery i.e. a cost for acquiring fixed assets required to complete the farming activity.


In 2004, the Union government constituted the National Committee on farmers (headed by MS Swaminathan and hence also called the Swaminathan Commission). The MS Swaminathan Committee report had recommended a minimum support price of 50% profits above the cost of production classified as ‘C2’ by the CACP, among other long term policy changes. Details here.


So What Does the 50% Above Cost of Production Actually Mean?


First - the recent announcement for the government is based on taking cost of production as A2, not C2 as recommended by the Swaminathan Committee. So if you’re a farmer who has just bought a tractor to till land, the rent/interest on the tractor would not be taken into consideration while arriving at the MSP. This is the primary concern with the recently announced hike. Here is an Indian Express article with math, which shows that the recommendation of 50% return over costs is satisfied for all crops only if the cost of production is taken as A2, i.e. the lowest level possible. If C2, or comprehensive cost is taken into account, the 50% above cost is satisfied only for a single crop. So even at a very high level, a farmers or his family’s labour, interest costs etc are not included in the calculation of MSP. Essentially the farmer’s time and effort for actually working on the land are not considered in the cost of production. The 50% margin is not something that goes into his pocket - he has to pay out interests, satisfy the bare minimum food, livelihood etc requirements, and only then can he count what he has left for longer term expenses.


Read it again & think about it for a second before you move on.


 Are Farmers Able To Sell Anything They Produce?


This brings us to the second problem with MSPs. They are announced only for a few major crops (23) - and the list does not include any perishable items like fruits and vegetables or milk. (Hence the frequent images of farmers dumping tomatoes and milk on roads - these crops simply are not supported by the government MSP).


Okay, so does this make life better for the farmers who do produce from among the 23 crops?


Now we get into some implementation details. How does the government assure that MSP is guaranteed for these 23 crops? Government organizations like the Food Corporation of India buy from farmers at MSP. This has two objectives - price security for farmers as well as ensuring food security by building up buffer stocks needed in emergencies (eg: the recent floods in Kerala, Karnataka, now Nagaland). However, the capacity for procurement is not infinite i.e. there is no situation where ALL surplus crop which can’t be sold in the market can be bought at MSP. This is because the procurement operations on the ground are not good enough and also because state governments don’t have enough money for purchasing. For all intents and purposes, only rice and wheat (being staple crops) have a near guarantee of procurement at MSP. For the rest of the crops, it fluctuates year to year and state to state.


So...What Does This Mean?


Essentially, MSP is NOT a guarantee of procurement at that price for any crop. If that is the case, how can successive governments claim that this is big step to increasing farmers incomes? The answer is - it is not. MSP is a short term step, and it is extremely tactical, not strategic. Any increase in MSP is good optics for any government in power, since 50% of India’s labour force is engaged in agriculture, and the rest of us don’t really understand what happens on the ground, having given up using our ration cards a long time ago.


Additionally, since procurement for rice and wheat is robust, this incentivizes farmers to produce these two crops, irrespective of the demand in the market, or the capacity of their land to have high productivity for these two crops (rice and wheat need a lot of irrigation and fertilization). This is just one of the ways the MSP mechanism distorts market demand supply. However, until such a time as infrastructure and supply chain linkages between demand and supply centers are fixed, MSP remains a necessity - even though it does not guarantee anything! Here’s an article detailing the issues with procurement at MSP.


What’s Next?


Considering the imperfections of the MSP mechanism in delivering actual prices to farmers, the government has also announced another set of schemes (it’s election year, so this is going to be the norm). One of them is called Price Deficiency Payments - where the farmer sells his produce in the market (not to the government) at the market price. If the market price is below the MSP, the government compensates the farmer with the difference in prices directly to the farmers bank account. On paper it seems solid, but again ask yourself - is it implementable? This means the government has to identify each farmer individually, figure out how much he has sold at what price and then transfer money to his account. It’s an ideal solution, and we can only hope the government machinery can implement it properly. The government is also considering using private players to add to the procurement infrastructure. I’d be wary, because this opens up avenues for corruption - the private sector is not known for its compassion towards consumers, and its not implausible to think of a scenario similar to the politician - contractor - bureaucrat nexus that exists in road construction today. Here’s a good article with the latest.


Phew, so that was long. But important. Indian agriculture is in a mess. Don’t let anyone tell you otherwise. This article covers only a minuscule part of the problem, and again, the focus is on asking the right questions. Read, be informed, and make up your own mind.


Until next week.




MSP basics - A summary of MSP

Reports on Doubling Farmers Income - Ministry of Agriculture - This is a list of longer term measures

Government Procurement operations - Food Corporation of India


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