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Vol. XXVIII No. 6, July 1-15, 2018

Is new MSP good for TN farmers?

* The writer is an Agricultural Economist and a former Consultant with the FAO.

Agriculture supports about 40 per cent of the population for livelihood. How it is impacted by the Centre’s proposal to introduce a Margin Guarantee Scheme to farmers is of importance. The present Minimum Support Price (MSP) scheme has been only moderately successful in many states and, so, continuing to call the new proposal by the same name may lead to its uninformed rejection. The new scheme being still in its embryo, there is opportunity for the Tamil Nadu government to interact with the Centre and ensure that the new proposal in its final form becomes a real boon to our farmers.

The present MSP offers protection to farmers against a falling market for produce. While in concept it is good, in practice it has not been as effective as expected, mostly because of implementation deficiencies. The Commission for Agricultural Costs & Prices (CACP) determines the national level production cost per quintal/tonne of each crop covered by the scheme. It is derived from data of each State which are weighted for the volume of production of that state and averaged for all the States of the country. To determine the cost of production, paid costs are taken and to these the imputed (although unpaid) cost of family labour on the farm is added. This is referred to as A2 + FL cost. Quantum of margin over the cost is arrived at by assessing the effect of the following factors supply demand balance, inter-crop price parity, domestic and international prices, terms of trade for agriculture and non-agriculture sectors and effect on cost of living – which sounds daunting.

Expectedly, this version of MSP has not been very successful. Data availability for cost determination has a time lag of a minimum 2 years. From this outdated data, the cost for the year on hand is extrapolated (really, in effect, guessed!). Farmers found that their experience of cost was very different from what is assessed by the Commission. The margin calculation factors are too complicated and lofty to be quantified and when some statistical dignity is given to the calculation the resulting margins over costs varied widely for different crops and seemed irrational. Importantly, there was total opacity in the process of formation of the final MSP and it was not convincing to lay farmers who were faced with real costs. The process, because of its elaborateness, took too long and, consequently, support prices were often announced after sowing was over. It was too late for planting decisions. Immediately after harvest, prices do collapse because of heavy arrivals in the market and farmers, anxious to encash their produce, undersell their produce. The procurement mechanism reacted belatedly to the falling market driving farmers into the waiting arms of exploiting intermediaries – on the whole rendering the MSP numb and ineffective in some States. In Tamil Nadu, where the public procurement mechanism functions relatively more efficiently, the scheme has been functionally more successful. Study reports cite instances of the centre fixing MSPs at variance with the recommendations of the CACP without any visible rationale suggesting the possibility of political considerations in fixing support prices. When produce was bought under the MSP scheme, payments took too long to reach the hands of farmers, putting them to financial stress. This made a lower price from the private dealer, on spot payment of cash, appear more attractive.

The proposed new MSP offers a pre-determined 50 per cent margin over production cost for each crop, straightway removing the non-transparent and time-consuming procedure for calculating the margin. The new MSP can be announced much sooner and in time for planting decisions. All that CAPC needs to do now is to calculate the cost and add the prescribed per cent margin. With a standardised formula, the production cost determination could be decentralised to States and these can be consolidated by CAPC further reducing the time needed to announce the MSPs. The vague element of margin under the existing scheme having been done away with, farmers can easily take the previous year’s price with a chance of it being higher by, say, 5-8 per cent and proceed. It eliminates room for politicising pricing decisions as the margin added to cost is pre-determined. The mystique surrounding the determination of the margin is done away with. For procured produce, payments can be made through the Direct Benefit Transfer system free of corruption. Thus, transparency and speed would make the new MSP a big improvement over the old one.

MSP is a better way of supporting farmers than deficiency payments. Under Madhya Pradesh’s Bhaavantar Bhugtaan Yojana (BBY), market arrivals of crops are rising to avail of the scheme. They have shot up by four times in the case of urad as compared to the previous year, when there was no such scheme, and 50 per cent in the case of maize and soybean. Market prices are manipulated through false billing to show lower prices to be able to claim the deficiency payment.

While the new proposal is a substantial improvement, there are a few asymmetries in the system, as it is today, that should be weeded out in the new proposal. Tamil Nadu Government must take these up in good time with the Centre to ensure that our farmers’ interests do not suffer.

Firstly, as paddy accounts for a third of land use and is a major part of production in Tamil Nadu, paddy farmers must be assured of the full or near-full benefits of the new MSP. A national average of production cost, although weighted for production volume, still works against the interests of our State. The national average gets reduced because a few States having the advantage of favourable irrigation conditions produce enough quantities to pull down the average. Tamil Nadu cost for paddy consequently appears high compared to the national average. This applies to the four southern states of Andhra Pradesh, Karnataka, Kerala and Tamil Nadu which together account for over 20 per cent of national production. Any weakening of the price assurance effect for these States would have a demotivating effect. In the new MSP, the datum line of production cost should be the weighted average of the cost in the four southern states. The existing disadvantage can be illustrated. For 2014-15, for example, according to CAPC, the All India production cost of paddy was Rs. 979/q. and for Tamil Nadu it was Rs.1266. Tamil Nadu’s MSP would only be based on 979 and would be 979 x 50 per cent = Rs. 1469 against its production cost of Rs. 1266 getting, in effect, only 16 per cent over cost instead of 50 per cent.

Secondly, in the case of pulses and minor millets, there is only one crop in a year and the production cost in rupees is relatively lower earning a correspondingly lower margin in value at the uniform 50 per cent margin over cost. This is inadequate to sustain them raising crops against odds. The mark-up margin should be higher at 75 per cent or more over production cost as this is the segment that is disadvantaged. These are all identifiable segments and, as such, there is no risk of the differential margin being abused. On the other hand, it is the offer of higher margin based on geographical or climatic distinctions that is open to abuse as neighbouring markets could send material to the specially treated segment to take illegal advantage of the higher margin. The Centre can be persuaded not to decree indiscriminately the same profit margin for all crops. The Finance Minister’s outline of the new MSP scheme does refer to a margin of return over production cost as at least 50 per cent.

A universal norm could drive out segments where production costs are higher because of natural handicaps like lack of irrigation, poor soils and uncertain rainfall. Not only do farmers in these areas produce and contribute to the total -supply, which is still needed, but there is also a sociological justification for them to be encouraged to be part of the economic mainstream.

Thirdly, discretion should be allowed to state governments to operate the designated mark-up percentage on a sliding basis. If 50 per cent over cost is available immediately in the wake of harvest, the entire production or most of it, is likely to be dumped on the public procurement system as no private dealer would like to match that price when so much is overflowing everywhere. He would be happy to see the government saddled with carrying costs of warehousing, transport, handling and wastage, for 4-5 months and buy the same material later at low prices from the government storage points. The MSP margin should be scaled according to the season – 30 per cent margin for one month or six weeks after harvest, 5per cent increase every month thereafter and 50 per cent continuing till close to the next harvest. MSP is not a one-shot match with market price, but a seasonally lasting game and, therefore, it has to be made dynamic.

Farmers in India need protection from two debilitating vulnerabilities. One is against the vagaries of the monsoons and the other is against the precipitous fall of produce prices immediately upon harvest. Nowhere are these as dramatically demonstrated as in raising sugarcane and in sugar production. Alternating shortages and zooming prices and surfeits with fall in prices and mounting cane dues are well known. Farmers’ weak financial holding capacity is fully exploited by intermediary agencies to derive unduly large benefits at the farmers’ cost. It is this vulnerability that a scheme like the MSP has the potential to address. The 50 per cent mark should not be read into too much as it is amenable to adjustments to make the MSP’s beneficial impact adequate and equitable. Properly implemented, the scheme holds the potential to spur the Indian farmer to raise paddy productivity from the present 5 t/ha to China’s 6.66 t/ha and Vietnam’s 5.55 t/ha.

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