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  1. Budget 2018: Creating a smokescreen of MSP over cost

Budget 2018: Creating a smokescreen of MSP over cost

Budget 2018: But what the finance minister appears to have suggested in his Budget speech, when he said they have already given at least 50% margin in rabi crops, is that they have covered Cost A2, or may be Cost A2+FL, as MSPs are still lower than Cost C2.

Published: February 6, 2018 4:57 AM
Budget 2018: The finance minister has made a smart move by announcing in his Union Budget speech that the government has already fulfilled its election promise of giving minimum support prices (MSP) at least 50% higher than their costs in rabi crops, and this principle will be followed in other crops too. Budget 2018: The finance minister has made a smart move by announcing in his Union Budget speech that the government has already fulfilled its election promise of giving minimum support prices (MSP) at least 50% higher than their costs in rabi crops, and this principle will be followed in other crops too.

Budget 2018: The finance minister has made a smart move by announcing in his Union Budget speech that the government has already fulfilled its election promise of giving minimum support prices (MSP) at least 50% higher than their costs in rabi crops, and this principle will be followed in other crops too. But this statement has also created a smokescreen, and perhaps blinded the opposition temporarily with tear gas shell. We look at it closely to gauge what it means for farmers. The whole issue boils down to what was the cost considered in its election manifesto of 2014. For those who are not very familiar with the exercise of MSP recommendations, there are several cost concepts that the Commission for Agricultural Costs and Prices (CACP) considers while recommending MSPs of 23 crops. There are the costs that the farmer actually pays out from his/her pocket for, say, buying various inputs ranging from seeds to fertilisers to pesticides to hired labour to hired machinery or even leased-in land, etc, which are all put under Cost A2 concept.

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However, in agriculture, farmers also use a lot of family labour. and if their cost is imputed and added to Cost A2, that concept is called Cost A2+FL. But then there is also a comprehensive cost (Cost C2), which includes not only imputed costs of family labour, but also imputed rental of owned land and imputed interest on owned capital. It is 50% margin over this cost C2, which has been at the centre of farmers’ demand, and also MS Swaminathan Committee’s recommendation. But what the finance minister appears to have suggested in his Budget speech, when he said they have already given at least 50% margin in rabi crops, is that they have covered Cost A2, or may be Cost A2+FL, as MSPs are still lower than Cost C2.

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But it bothers those who have ploughed these fields for long when this 50% margin of MSP over, say, cost A2+FL is being touted as a big game-changer decision of the present government which no other government in the past could undertake. That is simply not true. Even in the last year of the UPA, in 2013-14, MSPs for all rabi crops were way above 50% margin over Cost A2+FL. For example, in wheat, the margin was 106%, and in rapeseed-mustard 133%! For the current year of the NDA, the margins are 112% for wheat and only 88% for rapeseed-mustard (see chart 1). And this has been more or less the same for more than 10 years. So, there is nothing earthshaking that the current government has done so far in this regard.

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But then what was this election promise of 50% margin over cost when already margins were way above in rabi crops of 2013-14? Certainly, it was not Cost A2+FL, it was Cost C2, though it was never spelt out in detail. However, like the previous government, which rejected the Swaminathan recommendation on this issue, and rightly so, this government too found that it was impractical to give 50% margin over Cost C2 in all crops as it would have required massive increases in MSPs (for example, paddy MSP had to go up by 46%, cotton by 52% and so on; see chart 2). But it was in a fix to honour its election promise, and so it simply changed the reference cost from C2 to A2+FL without uttering a word about it. It may be noted that Cost C2 is normally 35-40% higher than Cost A2+FL. So, by lowering the reference cost drastically, it could claim that it has fulfilled its election promise in case of rabi crops and can do so for kharif crops soon. It is a smart sleight of hand! But saying that it is a game-changer and will be a major step towards doubling farmers’ incomes is going overboard and may soon boomerang, if the opposition is smart enough to see it through.

Although it would still need an upward revision in MSPs of, say, paddy by about 11%, cotton by 18%, moong by 20% and hybrid jowar by 41%, etc, the real question is whether it would reduce farmers’ woes given that less than 10% of peasantry has ever benefited from the MSP regime in the past. Does the government plan to go for price deficiency payments (PDP) at all-India level for 23 crops? The Madhya Pradesh experiment in PDP shows that market prices are prone to manipulation by traders, and it can end up helping traders more than farmers. Given that agri-GDP growth has plummeted to just 1.9% in the first four years of Narendra Modi government compared to 3.8% in the first four years of the UPA-1 government, Modi sarkar seems to be heading towards ‘India Shining’ days of the NDA-1 with a lot of overconfidence, but with its feet of clay in agri-rural sector. Politically, that may prove costly.

It may also be mentioned that cost plus pricing of MSPs, be it Cost A2+FL or C2, is fraught with dangers as it totally ignores the demand side. The terms of reference of CACP rightly require it to consider demand-supply, cost of production, price trends in domestic and international markets, terms of trade, inter-crop price parity, etc, before recommending MSP. If MSP is to be determined just by adding 50% margin over Cost A2+FL, better abolish CACP and let any babu in the Directorate of Economics and Statistics (DES), which estimates costs of production, fix MSPs.

Ashok Gulati & Ranjana Roy
Ashok Gulati is Infosys Chair professor for Agriculture and Ranjana Roy is research associate at ICRIER

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