India's Unhappy Farmers
Though the Modi government has taken various measures to improve the health of agricultural sector over the past three-four years, farmers are not happy. That is because some good schemes are taking time to show results while several initiatives have been killed even before they could take off. The examples of failed but good initiatives include land leasing reform and more recently, the minimum support prices or MSP for agricultural commodities. I will discuss the dynamics of MSP.
The Union Budget 2018-19 contains several goodies for agricultural growth and farmers' welfare. One announcement was MSP on various agricultural commodities would be based on total production cost plus 50 per cent margin. This has been the demand of farmers and farmers' organisations for several years. Implementing the new MSP, based on cost plus 50 per cent margin can increase farmers' income and be the way forward for doubling their income by 2022, one of the key goal posts for agricultural development by the Prime Minister. Unfortunately, this seems to be in the process of being killed even before it has taken off.
The controversy is whether production cost used to calculate 50 per cent margin will be A2+FL or C2 costs. A2+FL include all paid-out expenses in cash and kind incurred in production plus imputed value of family labour while C2 covers A2+FL plus rental value of own land, interest on value of fixed capital assets (excluding land) and depreciation on farm implements. Logically, total cost would mean at least C2, which farmers are demanding, while in official circles, the view is gaining ground that A2+FL plus 50 per cent margin should be the criteria for the new MSP. The reasons for not considering C2 are the anticipated increase in food subsidy bill and adverse effect of higher MSP on inflation. However, past experience shows the rise in MSP helps increase production and contain price inflation by bridging the demand-supply gap. During 2004/05 to 2013/14, contribution of MSP to food inflation was minimal due to the demand-supply mismatch in fruits, vegetables, meat and fish for which there was no MSP. Recently, the government increased the MSP of pulses, which led to record production in 2017/18, and fall in market prices. It also led to reduced dependence on imported pulses. The additional subsidy bill for implementing C2 plus 50 per cent margin as the new MSP at the existing level of procurement of rice and wheat will be `34,000 crore, which the government can afford.
Price Deficiency Payments
For crops other than rice and wheat 'Bhavantar' can work better, as the government does not have to purchase them at MSP and pay the difference between MSP and market price directly to farmers through DBT. Farmers will welcome this as they do not currently benefit from crop MSPs other than rice and wheat. MSP has only a notional value for most crops as harvest prices were generally higher than MSPs. Sometimes, even if the government may have to spend on price deficiency payment, this will be minimal, while farmers will be better off. There are several challenges to effective implementations of price deficiency payments as well. In years when production of any crop is large, market clearing prices may be too low and deficiency payments too high. There could be other administrative challenges for not having updated land record and title.
Conclusion
If implementation of C2 plus 50 per cent margin for new MSP and 'Bhavantar' brings back smiles to farmers, the government should not mind spending an additional few thousand crores for this. Besides, the new MSP for rice and wheat as well as price deficiency payments for other crops will not only be helpful in reviving the farm economy, but will also strengthen overall rural demand. The social welfare gain will be far greater than the anticipated cost.
