Pricing policy of minimum support prices (MSPs), it may be noted, is not rooted in cost plus pricing principle, though cost of production is certainly one of the important factors that go into the determination of MSPs. But there are equally important other factors such as overall demand and supply of the commodity under consideration, domestic and international prices, inter-crop price parity, terms of trade between agriculture and non-agriculture, and likely implications of MSPs on consumers of that product, which are all given as parts of the terms of reference of the Commission. In addition, the Commission also keeps in view the need for rational utilisation of water, land, and other production resources while recommending MSPs. Thus, all these factors are taken into account before arriving at MSPs of various crops. Yet, some of stakeholders do perceive skewness and feel for a need for greater transparency in the method of arriving at MSP. One way to make the method of arriving at MSP more objective is to assign suitable numerical weights to various determinants of MSP, depending upon relative importance of each factor. This will go a long way to enhance objectivity and instil higher degree of confidence of various stakeholders in MSPs.
As far as the issue of cost is concerned, it may be worth noting that detailed cost data used in its pricing policy is not collected by the Commission but by DES, Ministry of Agriculture, New Delhi. As there exists a time lag of two to three years in dissemination of cost data and given the imperative of announcing pricing policy for ensuing year, the Commission projects cost of production (CoP) of various crops for two to three years hence. An ex-post facto analysis of the projected and actual costs for the decade of 2000s revealed that, sometimes, these deviations have been large. Accordingly, to improve the accuracy in projecting costs, the Commission started applying correction factor (CF) to projected costs with effect from the price policy report for the Marketing Season 2012-13. However, a better method would be to upgrade the entire system of cost data collection, and reduce the time lags from 2-3 years to less than six months. This is already recommended by the Commission to the Government of India, and some action in this regard is being taken by DES.
While formulating price policy, the Commission considers weighted average CoP of different crops. If these costs were to be normally distributed, about 50% of production of a particular commodity would have CoP less than weighted average, while the other half would have costs higher than this weighted average. In 2010-11, percent of production that got covered at weighted average C2 cost in case of maize, for instance, was low at 42%. Equivalently, a majority of maize production (58%) was produced at costs higher than the weighted average C2 cost. In this backdrop, it is more appropriate to think of an alternative to the weighted average C2 cost viz. bulk line cost as an input in the formulation of pricing policy. In that event, the Ministry of Agriculture may consider laying down bulk line cover, say 75-85% (or any other percent) of production on a priori basis. And this level of cost must be juxtaposed against the export/import parity prices of the relevant commodity, as those prices constitute the relevant offer curve in make-buy options in an open economy environment, depending upon whether the commodity is being produced in abundance for exports at the margin, or is being imported at the margin. It is the comparative cost concept that should appropriately enter the price policy formulations.
In FY11, MSP covered C2 cost of 96% of sugarcane production, 94% of barley, 93% of paddy, 92% of R & M and 88% of wheat production in contrast to 32% of lentil, 36% of sunflower and less than 50% of tur. When C2 cost is covered, it implies that farmers not only recover their paid out costs but also get rewarded for use of their own resources such as land, family labour and capital. And this explains, at least partly, farmers preference to adhere to paddy-wheat and sugarcane cropping pattern vis--vis pulses or oilseeds wherever feasible. On cost structure, fertiliser constitutes just 5% in the total cost of production. Lower prices of urea (due to control and subsidy) in relation to other fertilisers have led to its heavy use at the expense of P&K. This calls for inclusion of urea in the ambit of NBS regime and freeing up of its prices. And if in the process, weighted average prices of fertiliser increase anywhere up to 10%, just as an example, its impact on cost of production would be less than half percent. Not only this would reduce the unsustainable imbalance in the prevailing consumption pattern of fertilisers but would also rationalise the fertiliser subsidy.
Farm wages account for 30% of weighted average total cost of production across crops under MSP. This coupled with the fact that real wages grew at 6.8% per annum during FY08 to FY12 is likely to give impetus to farm mechanisation. It may help in raising labour productivity, increase profitability, make agriculture more competitive, and ultimately reduce rural poverty. However, this may require initial hand holding in the form of some capital subsidies to begin with.
Profitability structure exhibits an upward trend during the last decade (FY01 to FY11) in most groups of crops, albeit with minor fluctuation in pulses group. Gross returns per hectare as percentage of paid out cost plus family labour i.e. (A2+FL) cost was the highest in case of sugarcane. It increased from 101% in the first four years of the last decade (FY01 to FY04, say period t1) to 128% in next four years (FY05 to FY08, say period t2) and further improved to 177 % by the end of the decade (FY09 to FY11, say period t3). Likewise, profitability during these three periods in cereals group increased from 56% to 80% and then to 81%, oilseeds from 63% to 83 % and then to 89% , cotton from 45% to 63% and to 103% and raw jute from 23% to 48% and then to 83%. In case of pulses, it was 80% in period t1, increased to 102% in period t2 but ebbed to 89% in period t3. Out of 22 crops analysed, 8 crops (wheat, barley, tur, lentil, rapeseed & mustard, sesamum, cotton and sugarcane) have reaped 100% or more gross profit, another 10 crops (paddy, maize, bajra, gram, urad, moong, soyabeans, safflower, nigerseed and jute) between 50% and 100%, three crops (jowar, ragi, and groundnut) could post profitability less than 50% towards the end of the decade. Only sunflower reaped gross returns less than 40% in the corresponding period. In absolute terms, sugarcane reaped the highest gross returns per hectare at R82,800/ha followed by cotton (R29,100/ha), and wheat (R24,300/ha) in period t3. However, significantly higher level of sugarcane profitability may be read in the backdrop of its far longer gestation period (sowing to harvest period) of over 10 months compared with 3 to 6 months in cases of other crops.
Disaggregated analyses reveal that irrigated tracts give rise to higher levels of profitability and these are the areas where fertilisers usage on per hectare basis is also significantly higher. Thus, the farmers who do not have access to irrigation are also the ones who get lesser subsidy on fertilisers on per hectare basis. This is a double whammy for farmers whose land is less endowed with technology (irrigation). From equity perspective, it is better to invest in irrigation infrastructure than on fertiliser subsidy when there is a competing demand on resources. This will augment farmers profitability and consequently will alleviate rural poverty. Empirical evidence shows that the real cost of production can be contained by improving land productivity and technology (irrigation) derived productivity. By containing the costs, Indian agriculture can become globally more competitive, and thus more remunerative on a sustainable basis. Therefore, investment in irrigation will be cost effective.
Ashok Vishandass & B Lukka
Vishandass is member (Official) and Lukka is economic officer, CACP
Excerpted from the CACP discussion paper Pricing, Costs, Returns and Productivity in Indian Crop Sector during 2000s