The government fixes the minimum support price (MSP) for 24 agro commodities (paddy, wheat, oilseed, pulses, coarse grains, cotton, etc) before the onset of the rabi or the kharif season based on the recommendations of the Commission for Agricultural Costs and Prices (CACP), constituted in 1965. For example, the FY16 rabi report of the CACP “recommended” the price of wheat in July 2014 itself, about 10 months in advance—while the harvest and marketing will commence in April- May 2015. Thus, the anticipatory fixing of irreversible values for grains that take 100-110 days to mature in the stresses of hot, cold and rainy climate is a futile exercise. More so when market dynamics may be totally different after about 12 months. The logic given is that farmers have to take sowing decisions based on the offered price or the price discovered by the government.
The determinants upon which CACP relies have a time-lag up to 3 years, because the data of previous year takes time to be updated. For example MSP of 2015-16 may be based upon inputs from FY11 or FY12 collated from different states. Is this not an absurd state of affairs?
The concept of MSP itself and the way it is calculated, thus, are both fundamentally flawed.
The prices of commodities cannot be “fixed”. Prices fluctuate, and have to fluctuate. When a commodity is treated and traded in the market, only then the price is discovered. The rest is all speculation. Pricing cannot be a bureaucratic exercise in the chambers of Krishi Bhawan or set through discussion with farmers and state governments given the latter are “interested parties”. Announcement of MSPs, thus, amounts to a speculative attempt by the government to manage the commodity markets. Values of a commodity vary at the time of transaction on a marked-to-market basis, depending upon multiple factors such as supply and demand within and outside a country, competing origins, environmental factors, geopolitical situation and currency parities, etc.
Furthermore, India’s MSP policy is an ascending-road model with no scope for downside correction—at least no so far. With the lower crude prices prevailing at the moment, the decline in land values, cheaper fertilisers, lower transportation cost and a rapidly cooling rate of inflation, is it not logical that MSP of commodities be lowered than the previous year? If not, thenMSP is conceptually a sham.
At harvest time—say, in April-July for wheat—there are abundant supplies in the market. Logically, the prices should moderate or touch the bottom. But procurement of 90% of harvest by the government at MSP within two months firms up the price in the market—30 million tonnes of annual wheat purchases by the government inject about R43,500 crore or $7 billion into the farm sector in just 60 days! This sudden rush of liquidity with farmers creates inflationary pressure in the economy.
The focussed procurement of paddy and wheat has deincentivized output of other crops like oilseeds. Cultivation of water-guzzling crops like paddy, higher imports of edible oil and declining export of oil meals, and the disparity in export prices of corn and cotton are the visible outcome.
Also, MSP becomes a handy tool for the state governments to indulge in profligacy of procurement for corn, barley or any other item at above the market price, creating a fertile ground for unrestrained rent-seeking. The formal procedure of purchases through tenders is dispensed with. Hiring of warehouses and disposal at lower prices become an avenue to milk the exchequer.
The commonly-held view that farmers will be deprived of MSP (better realisation for their crops) if the PDS is disbanded is unsupported by facts. As I wrote in my last column in FE, ‘Restructuring FCI realistically’ (goo.gl/T0gMgj), only 8% of the farmers benefit from public procurement. If 92% of India’s farmers can operate in the open market, what is the rationale of retention of a discriminatory arrangement such as MSP?
How can a nation of 3.3 million sq km, with 90% land area and 10% water, spread over 29 states attain or have uniformity in the cost of production and the parameters governing it? Factors of production—land, labour, capital, fertiliser and other inputs—have wide disparities in India but MSP is derived on average weighted basis! Any argument for MSP thus becomes defending the indefensible—even when correction factors are applied. The weighted average formula is an illusory mechanism. (Refer to the Discussion Paper No. 7 of CACP of June 2013 –“Pricing, Costs, Returns and Productivity in Indian Crop Sector during 2000s”, by Ashok Vishandass and B Lukka).
Though the CACP may claim that it determines MSP after detailed analysis of demand and supply, cost of production, international price trends, inter-crop price parity, etc, the skewed nature of the policy still prevails, as referred in the CAG report of May 7, 2013, (as shown in the accompanying figure). This skewness in 2006-2012 varied between a whopping 29-66% for wheat and 14-60% for paddy.
The MSP of wheat, at R1,450 per quintal, for FY16 carries a net margin of 22% (comprehensive cost is R1,191, as per the CACP rabi report for FY16).For considering international price parity, the CACP’s reference point is the US SRW wheat, at R1,580/quintal—absolutely naïve, given the reference price should have been the Black Sea wheat, priced at around R1,400/quintal.
Ideally, the CACP should have recommended a reduction in the MSP of wheat given excess stocks are stuck with the FCI/state government agencies—but it has advised the ritual annual increase, though, this time, it is marginal. A blame game follows with the onus then shifting to the union food ministry for its inability to liquidate 10 million tonnes of stocks as mandated by the PMO.
The absolute importance of dismantling the MSP regime cannot be denied. As the first step towards a rational pricing, Indian futures/spot markets, even if imperfect, should be used for estimating prices and enabling price discovery. This can also be supplemented by e-tendering on a daily basis if the mega-procurement under PDS is to be retained. Farmers can work directly or through arthiyas, brokers and commission agents for the e-tendering for the stock earmarked for sale to the government agencies. Crop insurance schemes may be put in place for extreme exigencies.
When the country is fully ready for income support subsidisation through the Jan Dhan Yojna, the government must relieve itself of the onerous public distribution system and let the private players take over and deal with the farming community at all levels.