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Last Updated : Jul 13, 2018 07:15 PM IST | Source: Moneycontrol.com

Podcast | Is the steep hike in MSP for kharif crops a giant leap for the Indian farmer?

Will the government's recent announcement of a steep hike in the MSP for Kharif crops, address all the battles that farmers have been fighting by themselves? Or will it just address part of the problem? Experts have different takes on the issue.

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Recently Nobel award-winning economist Amartya Sen and another well-respected economist Jean Drèze co-wrote a book called, "An Uncertain Glory: India and its Contradictions."

The book explores how despite India's robust democracy, its political structures have failed to address the essential needs of the people, especially of the poor, and often of women. The book talks about the country's inability to foster participatory and inclusive economic growth and equitable human development.

The book analyses many deprivations and inequalities inbuilt in what according to the authors is a lopsided development model.

If we just look at the farming community in India,  a certain section of farmers has become emblematic of dysfunctional grassroots economics.  Questions and struggles pertaining to land rights, debts, water scarcity, lack of a support system in the time of weather inconsistencies have created agrarian unrest over the years.

In this context,  will the government's recent announcement of a steep hike in the Minimum Support Price (MSP) for Kharif crops, address all the battles that farmers have been fighting by themselves?  Or will it just address part of the problem?  Experts have different takes on the issue.

Let us begin with the most important question of all. What is the MSP hike all about?

A report in News18.com simplifies the answer and explains MSP as a form of market intervention undertaken by the government, to provide a safety net to farmers in case of a price drop during bumper production years. The main purpose seems to be to support the farmers from distress sales and to procure food grains for public distribution. In the event that the market price of a commodity falls below the announced minimum price,  government agencies are committed to a purchase the entire quantity offered by the farmers at the announced minimum price.

We quote from the News18.com article, "MSP is a price for crops that the government guarantees to the farmers at all costs and under all circumstances. According to government policy, a total of 26 commodities/crops are covered under MSP.

This includes 7 cereals (paddy, wheat, barley, jowar, bajra, maize and ragi), 5 pulses (gram, arhar/tur, moong, urad and lentil) 8 oilseeds (groundnut, rapeseed/mustard, toria, soyabean, sunflower seed, sesamum, safflower seed and nigerseed), copra, De-husked coconut, raw cotton, raw jute, sugarcane and VFC tobacco."

The minimum support prices are announced by the Indian government at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).

What is the supposed benefit of an MSP hike?

The News18.com  attributes the need to hike MSP  to falling margins of profit for farmers and points out how on jowar, margins have reportedly fallen by as low as 18%.

For some time now,  protesting farmer leaders have been seeking the implementation of the MS Swaminathan Committee Report of 2006, which recommended a hike in MSP.

A little background report about the MS Swaminathan Committee Report. The National Commission on Farmers, chaired by Prof. M. S. Swaminathan, submitted five reports from December 2004  to October 2006to understand the causes of farmer distress and the rise in the tragic farmer suicides, and recommended a holistic national policy for farmers.

The report advocated access to resources and social security entitlements to achieve the goal of "faster and more inclusive growth" as envisaged in the Approach to 11th Five Year Plan.

But coming back to the current raise in the minimum support price, well, a  debate has ensued about how the implementation of these MSPs would deal with ground realities of the farming communities.

Are the farmers themselves happy with the move?

A Business Today story quotes Yogendra Yadav, Swaraj India president and founder of Jai Kisan Andolan in this regard and he has pointed out in the story that the support price fixed is not the rate that had been promised in the 2014 elections. The key electoral promise, says the story was the acceptance of the formula outlined in the Swaminathan Commission report.

Yadav thinks the MSP will help farmers with some amount of immediate relief but and we quote him here, "It is not a permanent and stable solution. It is merely a promise, the fulfilment of which depends on government procurement and intensive support, something that has been lacking till now."

He also explained that in the absence of a legal framework of enforcement, the support price will remain discretionary and farmers will have to rely on the whims of the next government in power to figure out just where they stand.

According to India Today, the farmers were for sure expecting the government to be more generous, and the announced hike is just enough to meet an increase in input costs from last year.

The story cites the example of paddy for instance. We quote again from the article, "The new MSP for the crop is Rs 1,750 per quintal, which is a record hike of Rs 200 per quintal. But as per the Swaminathan formula the rate ought to have been Rs 2,340 per quintal. So farmers are set to lose Rs 590 per quintal under the new MSP regime. The loss is much higher in the case of pulses." Unquote.

In the Today story, agriculture expert Ashok Gulati has given his take on the move and we quote him here, "The right policy instrument would have been income policy. The price policy has a limit if it goes beyond international prices. This will lead to accumulation of stock and hurt farmers even more." Unquote.

The article wonders if the  MSP hike is a case of too little, too late for the farmers given the spurt in the input costs for paddy, spiralling diesel prices and high taxation rates because of  GST.

The story mentions fertilizers that are now taxed at 5 per cent and pesticides at 18 per cent while farmers in  Punjab, Haryana were used to paying no tax for chemical fertilizers and paid no value-added-tax on pesticides under the earlier tax regime.

Now agriculture machinery too is taxed at 18 per cent, and it makes an already beleaguered farmer even more stressed.

Will the announced hike in MSPs actually manifest a better income for the farmers at the end of the day is the key question.

A new report by rating agency Icra claims and we quote, "Despite a healthy expansion in MSP for pulses in FY2018 and some procurement by the government agencies, the actual price realisation in the market was muted, with the wholesale prices falling below the MSP in some months." Unquote.

Many political leaders like the Vice President of India M. Venkaiah Naidu have given their views as well. The Vice President for instance has said that apart from providing MSP at 50 percent or more over the cost of production, the procurement process should be streamlined along with the PDS network so that the farmers gain even more benefit.

The opposition is of course less kind and is equating the move with an electoral lollypop  considering that the kharif crops will be harvested in October-November, which is exactly when Chhattisgarh, Madhya Pradesh and Rajasthan, go to polls but we digress.

What kind of farmers is the government targetting with the minimum support prices?

Livemint has wondered about this question as well and has tried to break down the diverse spectrum of farming communities in India  from small farmers, marginal farmers, peasants and kulaks to landlords. Add to this diversity, regional and geographical variations and we are looking at incredibly complex micro realities that vary from Bihar to West Bengal to the north-east to Punjab and Haryana. In every region, opines Livemint,  the crops differ as well from paddy, to coarse grains to cotton  and sugarcane. So we are back to the question, which category of farmers gains the most?

Livemint uses a National Sample Survey Office (NSSO) that mapped the income, expenditure and indebtedness of agricultural households in India in 2013 to try and get some answers.

Says the Livemint analysis and we quote, "For households owning farms of less than 0.4 hectares, who are a third of all agricultural households, net receipts from cultivation account for less than a sixth of income. They will certainly not benefit from higher MSPs.

For those holding between 0.4 and 1 hectare, net receipts from cultivation are around two-fifths of their earnings. This class constitutes another third of all farming households. They too won’t gain much."

So what the article explains is that a one glove fits all approach will not help here. Farmers owning up to 1 hectare of land constitute 69.4% of total agricultural households and we quote from the article, " their monthly consumption expenditure is higher than their earnings from all sources, which means they are chronically in debt. Many rely on moneylenders, rich farmers and landlords to advance them the money needed for cultivation and they are often forced to sell their produce to these financiers at lower than market prices. In short, almost 70% of farming households are unlikely to be beneficiaries of the MSP hike." Unquote.

Ironically, those who do not need that much help from MSP will benefit more from the move, states Livemint.

Says the story and we quote, " It is the rural rich, who  pay no income taxes, who gain the maximum benefit from farm loan waivers, who will reap the bonanza from higher MSPs." Unquote.

A Businessline report attributes the difficulties faced by farmers to agricultural distress emanating from shrinking agricultural margins. The report draws upon India Ratings and Research to say that the newly-announced minimum support prices will offer only a partial benefit to farmers.

Fixing MSP at 1.5 times of A2+FL (family labour) will marginally benefit rice farmers, whereas applying the same formula will not help wheat farmers at all as MSP rate prevailed in past many years was more than 1.5 times of A2+FL, says the report.

Another insight that has emerged from the study was that agricultural economy and rural economy cannot be lumped together, though the role that agriculture plays in rural economy is so crucial that the two terms are often used interchangeably.

So who will be affected the most by the MSP spike?

The answer is not simple. But there is a view that the steep rise in MSPs now will fuel inflation and it will affect the urban poor according to Livemint and also agricultural labourers whose number is much more than that of cultivators.

Also, there is no guarantee that the marginalised farmers will produce enough food for their requirements and will not have to buy from the market.

Livemint says that the economy will have to pay a price due to higher interest rates, uncompetitive agricultural prices, a bloated fiscal deficit and skewed incentives.

So as you can see, the jury is still out on whether the MSP hikes are a long-term solution to the struggles of the marginalised Indian farmer.

A surprising twist in the yarn

What has come as a surprise to many observers is the steep hike of 28% and 26% in the MSP on medium-staple and long-staple fibre cotton because the MSP hike has arrived after  five consecutive years of only single-digit MSP increases and also because the cotton prices currently are higher than the proposed MSP, because of the deficit in global and domestic supply.

Livemint thus asks the question and we quote, "Is higher MSP for cotton redundant then? Yes, in the short term. However, given the recent pest attacks and reduction in crop acreage, MSPs will work well to keep farmers committed to cotton cultivation, in spite of adversities." Unquote.

India is now the largest producer of cotton, according to the Livemint report and it is a good move to support farmers in cotton growing.

In the longer term though, a steep rise in Indian MSPs may lead to a high floor price in both domestic and global markets, in turn affecting

the well-being of spinning mills. Smaller ones especially may be adversely affected by the high raw material cost.

Many questions still swirl in the air

The questions of demand, supply and international competitiveness apart from the impact of the MSP move on India’s long-term GDP growth and prosperity are still bothering observers many of whom think that direct cash transfers to farmers are better than the 50% margin over costs of crops.  In Telangana ,cash grants of Rs 4,000 per acre per crop to farmers, have helped to some extent though there are inbuilt flaws here too.

A historical perspective

It would be heartening to remember though that our priorities were at some point right on point. At the onset of the sixties, India was in the throes of a cereal crunch and the nation's farmers were producing no more than 10 to 12 million metric tonnes of wheat.

India was not a self-sufficient grain bowl even in the mid sixties and we were exporting wheat from the US country and the wheat seeds that went on to plant the saplings of the  Green Revolution  that was followed by the establishment of the  Food Corporation of India or FCI in 1964.

In his column in www.bloombergquint.com, Siraj Hussain Visiting Senior Fellow at ICRIER and erstwhile Agriculture Secretary, Government of India remembers how the  Food Corporation of India would procure foodgrains from farmers at remunerative prices, distribute them to consumers through the public distribution system and maintain buffer stock for food security.

In 1965, recounts Hussain, an Agriculture Prices Commission was set up to advise on a price policy for agricultural commodities and its impact on the rest of the economy.

Over the decades,  FCI grew and began to impact most of the districts of India. Procurement of wheat and rice was primarily restricted to Punjab and Haryana, whose state governments made substantial investments in creating the required infrastructure of mandis and roads.

Assured of a remunerative price, says Hussain, the farmers took full benefit of subsidised fertiliser, seeds, and electricity and reached high levels of productivity.

Somewhere along the way, the big picture got muddied and the process of procurement has over time become patchy and uneven across the country with transportation of food grains from a handful of procuring states to all other consuming states becoming too expensive and wasteful.

While there are states that are investing in procurement apparatus, there are many others where the procurement apparatus is non-existent or rudimentary and MSP to farmers even for paddy and wheat is hard to come by, explains Hussain.

In many places in Bihar for instance, he says, agricultural commodities are sold on the side of a road where no facilities exist for farmers or traders.

Ironically, writes Hussain, too much of procurement may not be good for farmers either as it depresses the prices in the open market and the traders do not buy in the market and they wait for the government to sell excess stock.

According to another Economic Times report, the government decision to increase the minimum support price of crops has led to an upward movement in the price of agriculture commodities, particularly maize, rice, bajra, moong, tur, cotton and soya bean and traders and analysts expect prices of pulses and cotton to rise further.

In the final analysis

In a recent article in Tribune, agricultural economist V S Vyas has emphasised the need to link the rise in Minimum Support Price to proper procurement procedures,  infrastructural updates to store foodgrains and sufficient marketing facilities.

The main question, he says is now how to raise productivity with existing infrastructure and inputs per acre by reducing cost on production per hectare. Vyas, who was one of the members who set up  NABARD or the National Bank For Agriculture And Rural Development

36 years ago, also suggests that Farmer Producer Organisations (FPOs) should be involved in agriculture sector and their sustainability is the key to push the development agenda of agriculture in India, specially for small and marginal farmers.

We quote  Vyas here, "Due to fragmentation and disorganisation, it is not economically viable for small and marginal farmers to adopt latest technology and use of high yielding varieties of inputs such as seeds and fertilisers. They are also unable to realise the good value from their marketable surplus by individually selling their produce." Unquote.

So if we are looking at a country that must include its most vulnerable and underprivileged sections, especially its farming communities, the MSP surge can be termed as a good beginning but the journey must continue to create solutions and infrastructure that serves all the needs of the unsung, struggling Indian farmer.
First Published on Jul 13, 2018 07:15 pm
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