MSP for Kharif crops: Narendra Modi government's claim of 50% margin is an eyewash; devil lies in details

The minimum support prices of 14 kharif crops, which are sown during the summers, were announced on Wednesday. With this, the Narendra Modi government has sounded the election bugle. The minimum support price (MSP) of paddy (or rice) has been raised by 12.9 percent to Rs 1,750 per quintal. This is the highest increase in the MSP of paddy since the Modi government took over in May 2014. Also, this has been the highest increase in the MSP of paddy since fiscal 2012-2013, when it had been increased by 15.7 percent to Rs 1,250 per quintal. While, MSPs of 14 kharif crops were announced, paddy is the only crop that the government buys directly from the farmers on a large scale, through the Food Corporation of India (FCI) and other state procurement agencies. Hence, politically it is the most important. As is wont these days, the country is being told, that with this announcement a new era has started for the Indian farmer. Media headlines have screamed that the Bhartiya Janata Party (BJP) is fulfilling its 2014 poll promise of providing farmers a margin of at least 50 percent on their cost of production. In simple English, this basically means that if a farmer’s cost of production for a certain crop is Rs 1,000 per quintal, the minimum support price offered by the government will be at least Rs 1,500 per quintal. [caption id=“attachment_4487395” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] But the devil, as usual, is in the detail. And the detail, in this case is how the cost of production is calculated by the Commission for Agricultural Costs and Prices. First comes what is referred to as A2, which is basically what the farmer pays out of his/her pocket to pay for various inputs like seeds, fertilisers, hired labour, hired machinery, pesticides, among other things. Over and above this, farmers also use family labour. Once the cost of family labour is imputed and added to A2, what we get is referred to as A2+FL. Once the imputed rent on owned land and interest on capital is added to A2+FL, what we get C2, or comprehensive cost, as the Commission for Agricultural Costs and Prices, calls it. When it comes to MSP, the farmers have been demanding a 50 percent margin over C2, which is basically what the MS Swaminathan Commission (the National Commission on Farmers) had also recommended. The trouble is if any government implements this, the MSPs will go through the roof. Take the case of the MSP of Rs 1,750 per quintal on paddy (or rice) which was announced yesterday. The C2 for paddy works out to Rs 1,560 per quintal. A 50 percent markup on this works out to Rs 2,340 per quintal.  Along similar lines, take the case of hybrid jowar on which an MSP of Rs 2,430 per quintal was announced. The C2 for the crop stands at Rs 2,183 per quintal. A 50 percent markup on this would have worked out to an MSP of Rs 3,275 per quintal, significantly higher than the announced MSP. The larger point here is that a 50 percent markup on C2 will send agricultural prices soaring. This will feed into food inflation and overall inflation. And this is something that no government can ever afford, especially in an election year.  In fact, the Swaminathan Commission submitted its final report in 2006. The Manmohan Singh government was in power for nearly the next eight years, but it did not implement its recommendation of a markup of 50 percent over C2, when announcing the MSP, even though it increased the MSP generously, more often than not.  The reason for this is simple. It would have sent prices soaring. The Modi government has acted judiciously along similar lines. The question that arises - what is this “at least 50% margin over the cost of production” that is being bandied around by the Modi government? The MSPs that the government has announced, have a 50 percent markup over cost of production as defined by A2+FL. Let’s take the case of paddy. The A2+FL is Rs 1,166 per quintal. A 50 percent markup on this works out to Rs 1,749 per quintal. The MSP announced is Rs 1,750 per quintal. In case of hybrid johar, A2+FL works out to Rs 1,619 per quintal. A 50 percent markup on this works out to Rs 2,428.5. The MSP announced is Rs 2,430 per quintal. A similar way has been followed for the remaining crops on which the MSP was announced on Wednesday. The Modi government, as it is used to, is making a lot of song and dance about this move. The trouble is there is nothing new about a 50 percent markup on A2+FL, as a cost of production. It has happened before. Take the case of rabi crops in fiscal 2013-2014, the last year of the Manmohan Singh led UPA government.  The A2+FL cost of production of wheat was Rs 679.25 per quintal. The MSP for wheat announced was Rs 1,400 per quintal. This means a margin of 106 percent, much above the 50 percent margin. Let’s take a look at Table 1, which basically points out the margins over A2+FL for other rabi crops along with wheat.  As is clear from Table 1, the margins on five out of the six crops in the Table are above 50 percent. The larger point being that the 50 percent margin over A2+FL has already been granted in the past. It has happened more than a few times in the past. It’s just that it wasn’t marketed as well as the Modi government does. Of course, the BJP never really spelt out what it meant by the cost of production, in its election promise. And it is now cashing in on that. (Vivek Kaul is the author of the Easy Money trilogy)