MSP on agri produce has gone up, but does the farmer care?

The Union government recently hiked Minimum Support Price (MSP) for major agricultural commodities. It is a ritual followed every year, just ahead of the kharif season. Ironically, the government hikes MSP, but shies away from making it a legal guarantee, which is one of the primary demands of the agitating farmers in Punjab and Haryana right now.

Here’s a look at what MSP means for a farmer; is the recent price hike sufficient; is the government’s logic behind calculating MSP flawed and opportunities for farmers beyond government support.

Ground realities

Kewalram Rahangdale of Madhya Pradesh owns three acres of ancestral land, which he utilises mostly to grow paddy during monsoon (kharif) as well as in the winter (rabi). He has a borewell, which he uses to suck out as much water from the ground as he could till it runs dry by the end February in the absence of water recharge facility. For Kewalram, a Rs 72 increase in MSP does not make a difference. “I grow paddy because I cannot think of anything else that will give me assured returns; it doesn’t matter if I get a profit or not. I cannot diversify to maize or tur because despite MSP guarantee the government won’t purchase it for sure,” he says.

Kewalram’s argument makes sense. Last financial year, the country produced 100 lakh tonnes of chana (chickpea), but only 21 lakh tonnes was purchased by the government, which is just 21% of the total production. Similarly, maize production was 280 lakh tonne, but only 19 lakh tonne (6.7%) was purchased by the government. So, while MSP is guaranteed, procurement is not. As a result, farmers off loaded their stocks in the open market at throw away prices.

Milind Murugkar, a policy researcher, says, “MSP matters the most for farmers who grow paddy and wheat, but for other crops it does not make much of a difference if the support price increases or decreases, because the government purchases only a fraction of what is produced. So, MSP hike is just notional.”

The government claims MSP is 50% above the cost of production. “The MSP is calculated based on a system which is outdated. The cost of production (called C2) should be calculated in a way that all of farmers’ expenses are covered and he is left with a substantial profit,” said Devinder Sharma, a food and trade policy analyst.

As per the recommendations of the MS Swaminathan Commission, MSP should be 50% above the comprehensive cost (C2) of the farmer. But is the government giving C2? “While campaigning in 2014, Narendra Modi promised to give farmers A2+FL+C2. It was a big promise and impossible to keep. So today, the government calculates MSP by adding A2 and FL. Modi made a promise he could not keep. Therefore, the agitation in Delhi is raging for the last 5 months,” says Murugkar.

For records,

A2 cost = All paid-out expenses of farmers on seeds, fertilisers, chemicals, hired labour, fuel, irrigation, etc.

A2+FL = Actual paid-out costs + imputed value of unpaid family labour = Imputed cost of capital

C2 = Imputed cost of capital + rent on the land

Ideal MSP = A2 + FL + C2 + 50%

Actual MSP = A2 + FL + 50%

Why doesn’t the government purchase everything from farmers at a price they want?

It cannot, mainly because of the restrictions in place due to the World Trade Organisation (WTO) agreement which doesn’t encourage it to get into open procurement. “So consider, the Centre and states keep buying from farmers to keep the market cost above MSP. In such a scenario, the government will be carrying huge stocks of grains, which will be against WTO norms. Why? That’s because an over-stocked India will have to sell in the international markets. When India goes to the world market as a buyer, prices of food commodities go up, but when it goes as a seller, prices drop drastically. Thus, India selling impacts farmers’ income in developed countries. So, Indian farmers have to pay the price to keep those from developed world happy,” says Murugkar.

There is a general sense of disappointment and mistrust with the Modi government. That’s primarily because of the impractical promises that the government had made to garner votes. “Instead of promising to double farmers’ income by 2022, the government should have committed a base floor price, which will cover farmers’ cost and give them a reasonable profit above it,” adds Murugkar.

Prices fluctuate significantly in the international food market, which is beyond Indian government’s control because we do not have strong supply chain management systems nor do we have facilities like cold storage, which can act as a cushion against market uncertainties. The best the government can do is to be reasonable in making commitments and think beyond votebank politics.

Devinder Sharma suggests the MSP should be calculated the way we work out the industrial cost of products. “In agriculture, we include only the out-of-pocket expenditure, add family labour, and give 50% price over it. In case of industry, a businessman would include every cost including how much effort the family head, his wife or son have put in. Besides they get the advantage of Maximum Retail Price (MRP). Look at the commissions available to sellers. In pharmacy, the commissions could go up to 500% and in agriculture we give only 50% above the cost of production,” rues Sharma.

Besides, the government has increased MSP for paddy by Rs 72, which is 3.8% above the last year’s MSP and is less than the inflation rate prevailing right now. “How is this fair? It clearly means the farmer is earning less than what he is spending. There is a need to redesign the costing methodology so as to ensure firstly that a farmer gets real profit by way of calculating MSP using yardstick used for calculating industrial cost, secondly we must see the inflation is taken care of. If government employees get dearness allowance then farmers too should be adequately insured against inflation,” said Sharma.

Blame the economists

“I would blame the current crop of economists for farmers’ plight. We follow an economic design which wants to keep the food prices low for two reasons: To keep a tab on food inflation and to push people out of agriculture and supply cheap labour to urban areas. I think it is a flawed economic thinking. When you deny the farmer the price he deserves he gets agitated and you face the kind of protest going on in Delhi for so many months,” says Sharma.

Strengthen the farmer to strengthen the economy

Our GDP is at -7 right now and it was -23 a few months back. The agriculture sector is the only steady job provider as it grew at 3.4% in Q1 despite the GDP contraction due to pandemic. “Demand is down and industrial growth is not happening, which is affecting the purchasing power of the consumer i.e. common man. In India, 50% population is dependent on farming. So it is important to increase the purchasing power of a farmer to aid industrial growth. If you want to increase demand of large population then you can aim for inclusive development and that can come only by raising the productivity of agriculture,” said Murugkar.

Also read: Agrarian crisis on the boil again as farmers, labourers struggle

Deepak Chavan, a former journalist and agriculture researcher, suggests that farming based on market intelligence along with development of supply chain management systems by farmers themselves will go a long way in improving the condition of Indian farmers.

Common man doesn’t care enough

An agriculture economist once jokingly said, “MSP is not for farmers, but for the common man to think the government is doing something for farmers.”

The ignorance and lack of empathy shown by a majority of urban Indians towards the cause of agitating farmers in Delhi is reflective of the I-don’t-care attitude that most people live with when it comes to farmers’ rights.

A study done by Organisation for Economic Co-operation & Development (OECD) along with a New Delhi-based think tank says that between 2000 and 2016, Indian farmers lost Rs 45 lakh crore. Which means every year they were losing Rs 2.64 lakh crore. Why? Because farmers were given 15% less than the price they should have got. Ironically, during the same time consumers gained 25%. “Did we as a nation think that the farmers have lost Rs 45 lakh crore? Let the industry suffer a loss of one lakh crore rupees and there will be a big uproar. People will start talking about policy paralysis, tax incentives and economic stimulus. This clearly shows we have a bias against farmers and the economists are responsible for it. Why should farmers suffer to keep food prices low?” asks Sharma.

Chavan says the government is handicapped by lack of vital market inputs necessary to help farmers select the right crop and decide the right time to sell. “Sadly, the Reserve Bank of India also has a limited outlook on India’s agrarian crisis. Journalists lack the depth to pick up farmers’ causes. My only hope is the common man. If we can convince him about farmers’ plight, a real change is very much possible,” says Chavan.