Agriculture

With Latest MSP Promise, the False Narrative Surrounding Costs and Farmer Incomes Continues

The need of the hour is to set up a farmer pay commission, which can fix a minimum assured income of a farmer household.

While the initial MSP budget announcement sparked excitement, more realistic assessments soon weighed in. Credit: Reuters

About halfway during the budget speech – while announcing the government’s plans for dealing with India’s agrarian crisis – finance minister Arun Jaitley made a rather bizarre statement. Apparently, according to Jaitley, the Modi government has already provided more than 50% margin over cost of production for most crops this rabi season.

To further portray and label this budget as pro-farmer, he announced that the government will implement the prime minister’s promise of fixing minimum support price (MSP) at one-and-a-half times the cost of production. The moment I heard this announcement, I remembered a day three years ago (February 21, 2015, to be precise) where the Centre gave an affidavit in the Supreme Court where it stated that the government would not be able to enhance MSP for agricultural produce to be 50% more than the input cost. The affidavit stated that “prescribing an increase of at least 50% on cost may distort the market. A mechanical linkage between MSP and cost of production may be counter-productive in some cases…”

While the initial MSP budget announcement sparked excitement, more realistic assessments soon weighed in. After all, Jaitley’s claim that the government had already provided more than 50% margin over cost of production for most crops this rabi season was an exaggeration at best.

The M.S. Swaminathan committee had recommended fixing MSP at one-and-a-half times the cost of production and the-then prime ministerial candidate Narendra Modi had latched on to this, making it his poll promise in 2014. Swaminathan had mentioned in his report that the MSP be 50% over “costs of cultivation”. Now, while Swaminathan did not clear the air as to which benchmark was used to calculate“costs of cultivation” at that juncture, the annexures of the report make it clear that he used ‘C2 costs’ to calculate net farmer returns.


Also read: Why MSP at 1.5 Times Cost Is Another Empty Promise for Farmers


In agricultural parlance, ‘A2’ is the actual paid out cost (includes all expenses in cash and kind on account of hired labour including human, bullock, machine, seed, insecticides, pesticides, manure, fertilisers, irrigation charges and miscellaneous expense).

‘A2+FL’ is the actual paid out cost plus imputed value of family labour. And ‘C2’ is A2+FL+ the rental value of owned land and interest on owned fixed capital.

Hence, there is no ambiguity that when Modi was wooing the farmers of India in 2014, he was promising 50% profit over C2 costs. However, agriculture minister Radhamohan Singh has now said that “It’s going to be A2 plus FL. Land rental is a myth. Let’s begin first with a 50 percent mark-up on expenses incurred.”

Such statements are a clear indicator that Modi government has cleverly tried to create a false narrative, that the government has indeed walked the talk regarding their poll promise of 2014 by giving 50% profit over “cost of production” to the farmers.

But, then devil lies in the details. Consider the difference between ‘A2 + FL’ and ‘C2’ costs for wheat.

Data from the ‘Commission of Cost and Pricing’ for the rabi season 2018-19 shows that ‘A2+FL’ for wheat is Rs 817/quintal and a 50% profit over A2+FL will amount to Rs 1225.50/quintal, whereas the MSP set by Modi government  for the rabi season 2018-19 is Rs 1735/quintal.

Now, if the farmers were getting Rs 509.50/quintal more than the ‘price recommended by Swaminathan report’, why were the farmers on the street? Why was the prime minister crying himself hoarse over implementation of Swaminathan report in 2014 when the UPA  too was giving 50% profit over A2+FL as MSP?

The answer to this question is that farmers wanted that Swaminathan report be implemented in letter and spirit – that is, 50% profit over C2 costs.

Let’s take the same example of wheat. Data shows that C2 for wheat is Rs 1256/quintal and a 50% profit over C2, will amount to Rs 1884/quintal. And remember, the MSP set by the Centre for the rabi season 2018-19 is Rs 1735/quintal. If the government indeed considers C2 as the “cost of production” and the produce is procured at MSP , the farmer will get Rs 149/quintal more for his wheat crop. However, the farmer will not get a paisa extra in case  ‘A2+FL’  is considered as the “cost of production”.

Similarly, if we factor in 50% profit over ‘A2+FL’ costs for paddy, the farmer will get Rs 125.50/quintal extra over the current MSP of  Rs 1550/quintal and if we factor in 50% profit over C2 Costs for paddy, the farmer will get Rs 676/quintal extra.


Also read: Uttar Pradesh’s Hot Potato: Another Farm Crisis Ignored


Since, dedicated buying is only done for wheat and paddy, we can safely say that India’s farmers will only get some extra money if, and only if, the Centre considers C2 costs as the “cost of production”.

We also need to remember that, according to Shanta Kumar committee, only 6% of the farmers are able to sell their produce at MSP.  So, even if we assume, that the government will retract their position and set the MSPs by considering 50% profit over C2 costs, then also 94% of the farmers will not benefit.

What will happen to the majority of farmers, who have small land holdings of ~0.6 acres, who have no marketable surplus and have little or no access to institutional credit?

It is being said that the government is planning to launch a new “market assurance scheme” with a corpus fund of Rs 500 crore under which states will procure crops if prices fall below the MSP. Under this scheme, states will procure crops (except wheat and paddy) at the MSP, as notified by the government of India if prices fall below it.  Now, the million dollar question is whether Rs 500 crore is enough for bailing farmers out – especially when the value of oilseeds and pulses was Rs 2 lakh crore in 2014-15 and the total value of vegetables and fruits was over Rs 4.5 lakh crore in 2014-15.

The government had set up a committee under the chairmanship of Ashok Dalwai with a clear cut goal of raising the average incomes of agricultural households from Rs 96,703 in 2015-16 to Rs 1,93,406 in 2022-23 (measured at 2015-16 prices). This committee inferred that, in order to double farmer income by 2022, an additional investment of Rs 6.4 lakh crore will be required. But in this year’s budget, the allocation has increased, by only Rs 4,845 crore. There has been a deafening silence in the budget about the means of generation of this huge sum of Rs 6.4 lakh crore. Such omissions show the lackadaisical approach of the government toward the mammoth task of doubling the farmer income by 2022.

The need of the hour is to set up a farmer pay commission, which can fix a minimum assured income of a farmer household. It is the duty of the government to ensure that the difference between the stipulated income arrived by the commission and the farmer’s monthly realisations are credited directly to the farmer’s bank account. This will be “sabka sath sabka vikas” on ground, in real terms.

Ramandeep Singh Mann is an engineer by training and writes on agricultural and farmer issues. 

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