An interesting debate has been triggered in this newspaper on MSP pricing, especially with reference to paddy [see YK Alagh?s piece in FE, June 11 (Problem with raising paddy MSP), and earlier pieces by Surjit Bhalla, May 10 (Price of Paddy Populism) and Ashok Gulati, May 16 (Getting paddy prices right)]. Let me broaden this debate to overall incentive structures for agriculture in India, and what they mean for agri-growth and ?inclusiveness? in the growth process.

Let me start by saying that the issue of ?inclusiveness? in India?s growth story will remain illusionary unless we achieve at least 4% growth in agriculture. Global research shows very convincingly that one percentage growth in agriculture is at least two to three times more effective in reducing poverty than the same growth coming from other sectors. In the case of China it was 3.5 times more effective and in the case of Latin American countries?especially Brazil?it was 2.7 times more effective. But in India the reality is that in the last three plans we have failed to achieve this modest target of 4%.

Growth in agriculture is heavily dependent on investments in agriculture. More than three-fourths of investments in agriculture come from the private sector, basically from farmers. And they respond to incentives to invest. Looking at incentive structures from the trade angle, there are three elements that determine the overall incentives for agriculture. The exchange rate, the protection to the non-agri sector, and finally the trade and pricing policies related to agriculture. The overall discrimination against agriculture, which was reflected in the ?implicit taxation? of agriculture during the 1970s through mid-1990s, came from all these three elements. The over-valued exchange rate, high protection to industry, and export bans on several agri-commodities, all inflicted ?implicit taxation? on agriculture. But the economic reforms of the 1990s corrected at least two elements of this ?implicit taxation?. The overvalued exchange rates were corrected, and industrial protection was dramatically reduced. Both worked favourably to improve terms of trade in favour of agriculture. But the third instrument, namely controls on agri-exports, was relaxed only partially and in hiccups.

Look at even 2007-11, when wheat and common rice remained under export controls, and the fiasco on cotton exports recently. Export controls are a potent policy lever to stifle the agri-markets and turn the incentive environment into the negative zone. And we use this policy quite frequently, be it cotton or onions or rice or wheat! I can assure that if one puts an export ban on cotton for, say, 2-3 years, the entire revolution in cotton will be reduced to zero, and we will be soon importing cotton! This kills private incentives to invest. To neutralise this negative trade (incentive) policy, we then use MSP policy at home to ensure that farmers do get some positive returns over their costs/investments. We all know the real support policy exists primarily for wheat and rice, although the government announces MSP for about 24 agri-commodities. This is because in most of the other crops there is hardly any effective procurement machinery to provide a price support even when market prices dip below the MSP. But do the MSP for crops other than rice and wheat even cover their full costs of production and give a reasonable return? The latest actual cost data is available for 2009-10. If we take an average of three years, say 2007-08 to 2009-10, and compare the MSPs with their costs of production, here are the results for some important kharif crops, which are all in negative territory: jowar -21%, ragi -30%, tur -16%, moong -15%, urad -11%, groundnut -13%, sunflower -16%, soyabean -16%, sesamum -33%, nigerseed -25%. Only bajra and cotton had positive 6% returns, and maize 4%.

This only shows that our MSP policy needs a major overhaul if it has to be relevant at all beyond wheat and rice, and give some positive incentives to our farmers. Even in the case of paddy, the projected cost for the 2012-13 crop is R1185/qtl, and the current MSP of 2011-12 is only R1080/qtl, and if this is not substantially improved, the margins of MSP over cost will turn negative even in paddy. If that is what we call positive incentives through MSP policy, I am not sure whether we understand what incentives mean to farmers. Even in a supposedly lucrative crop like sugarcane, the ?Fair and Remunerative Price (FRP)? for the 2011-12 season is R145/qtl, which is less than 55% of the sugar price, while the best international practices suggest it should be above 70%.

Thankfully, our markets, even when they are heavily distorted, still give a better return to farmers than the MSP policy in most of the crops, be it jowar, ragi, pulses or oilseeds.

Conclusion: Either we should get the agri-markets right by removing all controls from export bans to movement restrictions to stocking limits on private trade, etc, or get our MSP policy right and effective. Only then can incentives be fully resurrected and agri-GDP propelled.

The author is chairman of the Commission for Agricultural Costs and Prices. These are his personal views