If the government wants to subsidise consumers, it is free to do so. Farmers can?t be asked to pay for this

Surjit Bhalla recently argued in this newspaper (Price of Paddy Populism, May 10, 2012, http://goo.gl/37deF) that the minimum support price (MSP) of paddy in India is the highest in the world, and that paddy farmers (kulaks) have been pampered, and CACP?s recommended MSP for paddy is dirty economics and dirtier politics. Mr Bhalla has a sharp mind (and sharp tongue!), and I very much respect and admire that quality of his. But here is a counter argument to his (after all, we are argumentative Indians), and let people judge where we stand on paddy pricing.

First, a few facts need to be corrected. Mr Bhalla is perhaps not aware that Thailand has revised its support price and is now committed to give an MSP of $480/tonne for paddy (unhusked rice). Vietnam, generally the second-largest exporter, is giving to its farmers $240 to $260/tonne for paddy. In the Philippines, it is $399/tonne for paddy and in Indonesia it is $360 to $440/tonne. In China, it is $240 to $380. I hope Mr Bhalla can now very well see that in India we are not very much out of line with other major rice producing countries of Asia, and in fact we are somewhat on the lower side. For 2011-12, our MSP of R10,800/tonne gets translated to $240 at an exchange rate of R45 to a dollar, but at the current exchange rate of R53 to a dollar, it turns out to be only $203/tonne. This would turn out to be lowest in rice producing countries, and needs major adjustment.

Second, the cost of production (C2) and marketing of paddy that the farmer is likely to incur on 2012-13 crop is projected to be R1,185/quintal. This is a weighted average at the all-India level and covers roughly half the production of paddy in the country, the other half has higher costs than this. At 2011-12 MSP of R1,080/quintal, majority of states will be making losses. Even a hefty increase that Mr Bhalla has indicated cannot cover full costs of major paddy growing states like Andhra Pradesh and West Bengal. No wonder, in Andhra Pradesh, farmers declared ?crop holiday? in 2011-12, saying that paddy is no more remunerative, and the area under paddy declined from 4.8 million hectares in 2010-11 to 4 million hectares in 2011-12. And in West Bengal, perhaps for the first time, the disturbing news of farmers? suicides hit the media headlines. I am sure Mr Bhalla does not want us to ignore these hard facts.

The costs of production for most of the crops have escalated sharply in the last three years, primarily led by labour costs. Labour costs, for example, have risen by 74% in the second half of 2011 over second half of 2008 at the all-India level, in Andhra Pradesh they have increased by 88% and in Tamil Nadu by 94%. DAP prices have almost doubled in a single year. The overall cost of production of paddy at the all-India level for the 2012-13 crop is likely to be 53% higher than in 2008-09, and the MSP increase for paddy during 2008-09 to 2011-12 has so far been just 20%. Thus, the margins in paddy cultivation have been shrinking, and need to be adjusted.

Of course, cost?though an important element in pricing?cannot be the sole criterion for pricing. And we do realise that very well. The demand side is as important, if not more, as the supply (cost) side. It is the interaction of demand and supply curves that determines the equilibrium price and support price should be somewhat below that, if it has to have any relevance. The demand for rice (paddy) consists of domestic demand and exports demand. But in an economy, where exports of common rice were banned for four years, where some states even today do not allow free movement of paddy/rice on private account, where government puts levies as high as 75% on millers in some states, and stocking limits are imposed on traders/millers, how does one get the market-determined ?equilibrium price?? Mr Bhalla is well versed with trade policies and I hope he understands very well that any export ban on farm produce would ultimately result in ?implicit taxation? of cultivators of that commodity ? and so was the case with paddy farmers during September 2007 to September 2011. Now when India has opened exports of common rice, the exports are likely to be at record level of 6.75 million tonnes in 2011-12. But much of the benefit of this has been going to the exporters and millers as there is still excess supply at home. As per CACP?s calculations, the fob price is likely to be between R1,500-1,700/quintal of paddy and we would very much like the Indian paddy farmer also to share in this exports gains.

So, to wind up, whether you look at from international perspective of what other rice growing countries in Asia are giving to their paddy farmers, or from the supply side (rising costs) or the demand side (fob pricing). All roads lead to a major adjustment in our MSP pricing for paddy. I can understand his concerns about food inflation and its consequent impact on the poor. But when the government is committed to supply rice at R3/kg to the poor under the proposed National Food Security Bill, it is high time that we free up the farmers subsidising the poor. Else, I am afraid, we run the risk of making our paddy farmers poorer.

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