MSP hike: With $27 bn of cotton and rice exports at risk, this is a solution that creates its own risk

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New Delhi | Updated: Jul 02, 2018 7:34 AM

Government is likely to spend around Rs 190,000 crore anyway this year to procure around 68 million tonnes of wheat and rice.

Government needs to work on alleviating farm distress

Given the government is likely to spend around Rs 190,000 crore anyway this year to procure around 68 million tonnes of wheat and rice, the costs of the price deficiency plan (PDP) based on higher minimum support price (MSP) don’t look too high. Based on the likely MSPs for all crops—MSPs will be fixed at 1.5 times the A2+FL costs except in wheat, where it is already 2.1 times—the scheme’s cost will be Rs 174,000 crore in case the market prices fall 20% below the MSP at the time of harvest. If market prices fall 30% below the MSP, the cost will rise to Rs 260,000 crore.

The problem, however, is that the current procurement schemes and the PDP are not mutually exclusive. So, once the PDP is finally announced, chances are the government will continue to procure wheat and rice as before—but at higher MSPs—and make deficiency payments for the other crops, as well as for the wheat and rice that it is unable to procure. If it procures the other crops, instead of just making deficiency payments, the costs will shoot up further.

So, while the final costs of the PDP will become clear only after the contours of the plan are made public, the government has to keep in mind the deleterious impact it will have. There will, of course, be distortions in the cropping pattern because of the increase in the MSPs. Cotton MSPs, for instance, will rise by 28% while there will be no hike for either tur or urad since their MSPs are already 1.6-1.7 times the A2+FL costs. Jowar cultivation could also rise significantly since the MSP will rise 44%—the current MSP is just 9% greater than A2+FL costs—but, with little demand for this crop, a rise in output will just depress prices further and, in turn, increase the deficiency payments. Indeed, one problem with Madhya Pradesh’s Bhavantar, on which PDP is based, is that traders manipulated prices, and it got so costly that the state had to suspend the scheme.

Apart from distortions in crop production, what is even more worrying is the impact on exports. In the case of rice, for instance, MSPs will rise by 13.5%, taking the cost of finished rice to Rs 26,651 per tonne. Once transport costs are added, to take the rice to Kandla port for instance, this makes it more expensive than existing global prices. Indeed, if the rupee falls below 67 to the dollar, the average assumed for FY19 in the calculation, the equation gets even more adverse—India exported $7.8 billion of rice in FY18.

In the case of cotton, where MSPs will rise by a whopping 28% if this formula is used, a lot more is at stake. On average, prices of finished cotton will rise to Rs 156,364 per tonne as compared to the current global price of around Rs 125,553 per tonne, based on a Rs 67 per dollar exchange rate; right now, with finished cotton at `121,818 per tonne, India is still competitive. Nor is the problem restricted to just exports of raw cotton. Since two thirds of all fibre used in India—both for local and exports market—is cotton, this will affect exports of both textiles and ready-made garments. India exported $19.34 billion worth of cotton, cotton-based textiles and ready-made garments in FY18, and a large part of this would become uncompetitive

In which case, since the government needs to work on alleviating farm distress—it has not been able to really free markets which would have helped farmers get better prices—a more practical solution is to make Telangana-style cash payments to farmers based on the acreage of land they cultivate. While the cash will reduce stress, farmers will continue to grow crops based on their natural attractiveness instead of on the basis of artificial prices set by the government—wheat MSPs right now are 2.1 times the A2+FL costs while this is 1.38 for rice, 1.09 for jowar, and 1.64 for tur, etc.

While the Telangana government is paying farmers Rs 8,000 per acre as cash support in two equal installments—Rs 5,000 crore has already been disbursed since the scheme began in May—Icrier professor Ashok Gulati has proposed a Rs 10,000 per hectare cash subvention that will cost `1.97 lakh crore across the country. While the per acre amount looks quite small, a look at the cost structure of most farmers suggests it is not. The latest reports of the Commission for Agriculture Costs and Prices estimates farmer profit—the latest data is for 2014-15 sadly—at Rs 4,265 per hectare for paddy, Rs 6,585 for tur, Rs 3,954 for cotton and Rs 10,842 for wheat, etc; profits have been calculated over the higher C2 costs, not A2+FL. Given how the scheme benefits farmers without distorting farm practices, and how it can’t be manipulated by traders either, the government would do well to look at using it instead of the proposed price deficiency one.

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