Monday , 19 February 2018

In Reality MSP Does Not Give Much Relief

Dr D M Deshpande

It was clear from the beginning that being pre-election budget, it would be oriented towards farmers and rural sector. And why not, that is the constituency which is in utmost need for government attention as well as intervention.  By now it is well known that the distress in rural sector is pretty widespread; in fact, it has forced farmers in several states to agitate and come to streets.

Just to put things in perspective, farm incomes have stagnated for the last four years. Even an odd bumper harvest has not been of much help to agriculturists. Reasons for farmers sufferings are not far to seek, falling prices due to near glut output conditions, large and mostly untimely imports and demonetisation. This certainly does not go well with avowed objective of the Government to double the farm incomes by 2022. Nor does it help to uplift a sizeable number of people who are still languishing below the poverty line. Nearly half the work force in the country is ostensibly engaged in agriculture. However, the share of agriculture in total GDP of the nation is constantly decreasing, which is as it should be in respect of an economy transforming from traditional to modern sectors; presently share in GDP is down to 15%. How to displace large numbers of workers from agriculture and absorb them in gainful employment in secondary sector has remained a challenge for decades since independence.

It is in this context that one has to see the announcement of the Finance Minister with regard to two points. One, to give MSP (Minimum Support Price) of 50% over and above costs, and two, the scheme will now be extended to all major crops. MSP is a price concept and there are different ways in which it is calculated. Actually, it is the job of Commission on Agricultural Cost and Prices (CASP) to recommend the right price for a crop. But MSP has invariably been used as a political instrument. More often than not, sound economic recommendations of CASP have been overruled by governments to accommodate one or the other coalition partner of the ruling alliance. Of late, it is seen that there is greater rationale in fixing MSP, but the decisions still remain political.

MSP concept and it’s operation is like selling ‘put’ option to the farmers. It will become relevant and operational only if the market prices fall below the threshold level, that is, MSP. In that sense, it acts like an insurance scheme. In fact, it does not require large sums of monies to be set aside for this scheme. However, it is another sad story that several farmers in various states have had to sell their produce below MSP in the last two years.

It is interesting to see how the MSP or the base price is calculated. CASP uses various cost concepts to arrive at the price. The basic one is the input cost, that is the cost of seeds, fertilizers, hired labour, electricity, hired machinery and/or equipment, even leased land, etc and other out-of-pocket expenses, if any paid out by the farmer. All these are included under Cost A2 concept. However, typically in Indian agriculture, a lot of family labour is used for which, of course, no cash payment is made. But it is a case of opportunity cost or income forgone. So if this cost is imputed and added, then it becomes Cost A2+FL.

Further, there is a more comprehensive calculation of cost which not only includes input costs and family labour but also imputed rental cost of the land and imputed cost of owned capital, referred to as Cost C2. This is what the farmers have been demanding and also the one that has been recommended M S Swaminathan Committee. But when the Finance Minister announced that we are already giving 50% more than cost in respect of 23 crops, he was probably referring to Cost A2, or possibly to A2+FL.

In order to cover the Cost C2 and still give 50% more, the price has to be higher by at least 35 to 40%. Clearly, the Finance Minister seems to have changed the reference cost itself to claim that the Government is already paying 50% margin in MSP. Call this a smart sleight of hand, if you may, for the Government has remained tight lipped on the issue of calculating the price!

While we continue to debate 50% hike, actually what farmers need the most is economic freedom. Rather than resorting to cleverly designed/disguised subsidies, governments will do well to unleash the entrepreneurial spirit among farmers with good roads, connectivity and comprehensive crop insurance. Removal of minimum export price, in this regard, is a step in right direction. Time has come for removal of all types of price controls, unshackle farmers and farm output.

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