[op-ed snap] The price is right

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Mains Paper 3: Agriculture | Issues related to direct & indirect farm subsidies & minimum support prices

From UPSC perspective, the following things are important:

Prelims level: MSP system

Mains level: Government intervention in the agricultural sector and their overall impact


Context

Hike in MSP

  1. The cabinet has approved MSPs for Kharif crops for the year 2018-19
  2. The MSPs are not only 50 percent higher than the cost, in some cases, they are far greater
  3. Since the beginning of the economic reforms in the early 1990s, the focus of agricultural policy has shifted towards prices
  4. Farmers are losing faith in the market and seeking direct intervention by the government, mainly at the Centre
  5. The situation has been aggravated by unanticipated increases in the domestic production of some crops like pulses and the low global prices of agricultural commodities exerting downward pressure on domestic prices

History of MSP system

  1. India started the system of MSPs in the mid-1960s for wheat
  2. It gradually brought all major cereals, oilseeds, pulses, cotton, jute and sugarcane into its ambit

MSP economics

  1. The Union government has decided to keep MSPs at least 50 per cent above the sum of cost of production (A2) and imputed wages for the time spent by the farmer and his/her family (FL) in crop production
  2. A2 is a comprehensive cost and includes paid or imputed costs of all purchased or own inputs like seed, fertilizer, manure, bullock labour and machine labour, interest on working capital, irrigation expenses, depreciation, rent paid for the leased-in land, costs of repair and miscellaneous expenses

Using C2 cost instead of A2 will not be good

  1. Cost C2 is arrived at by adding the rental value of owned land and interest on fixed capital to cost A2 plus FL
  2. On average, around 40 percent of Cost C2 (imputed rent for own land and imputed value of family labour used in crop production) is not a cost but income to the farmer
  3. If MSP is just equal to cost C2, it includes 40 percent as a net return for the farmers
  4. No principle of economics tells us to award a margin on those costs which are not actually incurred
  5. Keeping MSP at 50 percent above cost C2 involves an increase in the current MSP by 27-89 percent for kharif and up to 45 percent for rabi crops
  6. Such a price entails a 50-100 percent increase in the existing farm-level prices of some crops at one go

Impact of using the C2 methodology

  1. Demand-side factors at present do not support such a sharp increase in prices
  2. In such a situation, the private trade will not have any incentive to operate in the market
  3. The entire onus of procuring the marketable surplus will come on the government, which in turn will be required to heavily subsidize the procured produce in order to dispose of it
  4. This will make domestic prices much higher than global prices, which will strongly hit exports and make India attractive for imports
  5. It will also leave little incentive for efficiency and diversification in the crop sector
  6. Such a move involves keeping prices artificially high and cannot be sustained fiscally

Why should market intervention in terms of prices be minimum?

  1. Excessive intervention in prices can have serious implications for the functioning of the market, fiscal resources and imports and exports
  2. The best prices for farm produce can be realised from a competitive market

What can be done to ensure fair prices?

  1. Regulatory reforms
  2. Institutional changes
  3. The development of appropriate infrastructure to promote the evolution of the agricultural market system

Way forward

  1. The new MSPs announced by the government for kharif crops meet the spirit the Swaminathan Committee recommendation of 50 per cent net return over Cost C2
  2. The stakeholders now need to differentiate areas for action by the Centre and the states
  3. There is a particular need to put pressure on the states to undertake the required reforms to make agricultural markets more efficient, competitive and responsive to the needs of producers and consumers
Minimum Support Prices for Agricultural Produce
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