Confusion over MSP

Speaking at the Krishi Unnati Mela 2018, Prime Minister Narendra Modi reportedly complained that confusion was being spread about the announcement on minimum support prices (MSPs) made in the Finance Minister’s 2018 Budget speech. The speech had assured farmers that they would, in future, be able to sell the output of notified crops to the official procurement agencies at prices to be set at a minimum of 1.5 times the cost of production.

According to the Prime Minister, the confusion being created relates to how costs of production would be calculated. In an attempt to clarify, he stated that beside the costs paid out by farmers (for seeds, water, fertilizer, pesticides, equipment, etc.), the computed cost of production would include the imputed cost of family labour and of the capital assets owned by them deployed in cultivation. This type of cost computation is not new but corresponds to what the Commission for Agricultural Costs and Prices identifies as the C2 cost of cultivation, as opposed to A2, which covers only actual paid-out expenses. Another formula is A2+FL, which also imputes the cost of family labour.

Cost definitions

Given these definitions of alternative costs, there would have been no confusion if the government had specified in its budgetary announcement which of the definitions it planned to adopt. There are also other sources of confusion. These relate to why, despite the existence of a system in which “cost plus” minimum support prices are routinely computed and declared, the viability of crop production in the country is in question, resulting in an inability to service debt, in farmer suicides, and in farmers’ agitations that erupt with increasing frequency.

Reports have not only made clear that hitherto MSPs have been way short of the 1.5 times C2 cost that would make them remunerative, but that most farmers do not even have access to the declared MSPs and often end up selling at market prices that rule below the MSP.

This raises three questions. First, why, despite routine calculation of C2 costs, has the government chosen not to offer farmers a price well above that cost, which gives them a decent return? Second, why has sale of production at the declared MSPs eluded many farmers? And third, why have market prices tended to rule below MSPs in certain years and for certain crops, inflicting much damage on farmers’ livelihoods?

Since C2 costs are being calculated for crops notified as eligible for MSP, it must be the case that the government has so far consciously chosen not to set MSPs at 1.5 times those costs or even higher. In fact, while this was true even under the previous United Progressive Alliance (UPA) governments, the evidence suggests that the MSPs set under the UPA were closer to the remunerative price recommended by the M.S. Swaminathan-chaired National Commission on Farmers than those set by this government. Also, annual increases in the various MSPs have shrunk recently.

According to CRISIL, an analytical company, “While the average annual growth [in MSP] between agriculture year 2009 and 2013 was 19.3 per cent, it was only 3.6 per cent between 2014 and 2017.” The reason for the reluctance to offer farmers a remunerative price is not difficult to fathom. The government has chosen to incentivise private investors with a lenient tax regime and remains obsessed with fiscal consolidation and deficit reduction because it is keen to showcase its commitment to neoliberal economic policies and establish that it is the “most reformist” government that India has seen. In the event, it does not have the money to finance a farmer-friendly procurement regime that offers remunerative prices.

Subsidies and prices

Offering farmers a remunerative price would mean that unless the prices of grain and other products sold by the government through fair price shops and other outlets are raised, the subsidy required to sustain the system is larger. Moreover, if selling prices are raised to rein in the subsidy, offtake will likely fall, raising the stock held by the government over any period of time. That would mean higher carrying costs and larger losses in storage and, therefore, lower net realisation as and when sales do occur. That would also increase the subsidy bill.

It is clearly to keep subsidies down that a fiscal deficit-obsessed government unwilling to mobilise additional resources through taxation has chosen to keep MSPs low and limited the pace at which they are adjusted upwards to cover rising costs.

While prices are lower than warranted, costs have also been rising rapidly because of the government’s adherence to neoliberalism. The fiscal conservatism associated with neoliberalism has affected agriculture in multiple ways. Public investment in agriculture has been in long-term decline. The extension system, aimed at reaching new agricultural technologies and information on better farming practices to agriculturists, has either been dismantled or allowed to degenerate.

Agricultural research, which served India well during the Green Revolution years, has been given inadequate attention and resources. All of these have affected productivity adversely and kept unit costs higher than they should be. On the other hand, prices of inputs such as fertilizer and, in some States, power used for irrigation have been raised to curtail subsidies or reduce public sector losses. With costs rising and MSPs lagging behind, margins tend to be squeezed.

Moreover, not all farmers are able to obtain the benefit of MSPs, even to the extent that MSPs could serve as floor prices and offer farmers some protection. Also, procurement is concentrated in crops such as wheat and rice and in a few States. Based on figures from the January-June 2013 period, an official committee estimated that just 5.21 million out of 90.2 million agricultural households, or less than 6 per cent, reported sale of rice and wheat to procurement agencies.

Clearly, the same factors that encourage the government to keep MSPs low are holding it back from giving the benefit of even this price to a majority of farmers. Some State governments have sought to enhance the level of procurement. But most, deprived of funding because of inadequate revenues from the tax sharing between the Centre and the States mandated by the Finance Commissions and limited revenue-raising capacity of their own, have not been able to. In the event, MSPs do not serve as floor prices for most crops.

No benefit for farmers

If there is no floor, open market prices tend to fall sharply during years of good or even normal harvests. The result is the bizarre spectacle where market prices are below MSPs in some seasons. Meanwhile, trade liberalisation has linked domestic market prices to international prices, and domestic MSPs are increasingly calibrated keeping international prices in mind. This was not a problem when international prices were ruling high because of the commodity price boom. But it has been a problem in recent years when international prices have been low since farm output cannot be diverted to export markets to benefit from higher prices.

However, even in bad harvest years, when international prices rule above domestic market prices, farmers do not benefit. The comfortable foreign reserves of the country, generated by capital inflows facilitated by capital account liberalisation and no or low taxation of capital gains, encourages the government to allow and even arrange for imports during bad harvest years, while discouraging exports by imposing minimum export prices, in order to rein in inflation in the prices of essentials.

So, prices remain subdued even when production is low, affecting earnings adversely. As a result, in good, indifferent or bad harvest years, the farmer is often the loser. An estimate, based on the official National Accounts Statistics, indicates that over the three-year period between 2014-15 and 2016-17, the income per head of the agriculture-dependent population increased by 16 per cent in nominal terms. Over the same period, inflation based on the consumer price index for rural India rose by 16.3 per cent. This implies that the real, inflation-adjusted incomes of the agriculture-dependent population have stagnated.

Thus, the system has been heavily loaded against the farming community, not in spite of but because of the neoliberal policies adopted by the National Democratic Alliance (NDA) government. It has taken a spate of farmers’ movements and a set of electoral losses for the government to wake up to the political implications of this fact.

Put simply, empty promises of doubling farmers’ incomes by 2022 are not working and rural India is turning its back on this government and its policies. But, given the fact that the government privileges its reformist image above all else, it is hard put to find a solution. That is possibly why the Prime Minister is blaming the opposition for spreading confusion among farmers and the public. However, the confusion, if any, lies in the agenda and policies of the government.