Misplaced Emphasis: Chimera of MSP as Cost plus 50 percent

Introduction

The 2018-19 Budget for India presented on 1st February 2018 has, inter alia, mentioned about increasing the minimum support price (MSP) being given to farmers to cost plus 50 percent so as to ameliorate the distress of farmers' and facilitate an increase in farmers' income. This is a chimera. The decision-making authorities in the Government that decide the MSP represents the lioness-like head, the calculation of cost is the goat-like body, and crop production is the serpent-like tail.

Lioness-head

The budget speech conveying cost plus 50 percent was the head spitting fire to douse discontentment among farmers' (relying on the dictum that a product of two negatives will be positive). The idea for a cost plus 50 per cent is not new. This was indicated by the National Commission on Farmers(Chair: MS Swaminathan) that submitted its final report in October 2006, which has now been resurrected after more than a decade to address a rural constituency.

It needs to be mentioned that MSP is declared for only 23 crops, but effective for two crops - paddy and wheat. Even for these two crops, after allowing for double counting, a January 2015 Report of the High Level Committee on Reorienting the Role and Restructuring of Food Corporation of India (Chair: Shanta Kumar) using 70th round National Sample Survey data for July 2012-June 2013 indicates that less than 6 percent of agricultural households sold to procurement agencies who buy at MSP and these households sold only 27 percent of their produce to these procurement agencies. In short, cost plus 50 percent will have limited impact.

Goat-body

A calculation of the cost of production has many layers. First, it is an average of averages and that too from selected states. Under this, states that are major producers of the crop collect detailed data from sample farmers (the selection bias is likely to be there for those farmers who have some output and exclude those with no output and thereby underestimating costs). The data sent by states are again averaged at the all India level by the Commission for Agricultural Costs and Prices (CACP). Even if there is no selection bias, any average will have a distribution with some states and some farmers having a greater cost than the average. The greater costs are likely to be more for those whose output has been less for various agro-climatic and socio-economic reasons. Whatever may be the reason, a single cost will not have the same ameliorating effect across all farmers and across all states.

Second, and more importantly, to address the spirit of the recommendation by the National Commission on Farmers it is only appropriate that all costs (paid out and imputed) should be taken into consideration. This is complicated by the fact that there a number of variations, as per the terminology used by CACP. They are as indicated in Appendix 1. The contention being raised is that MSP is fixed based on A2+FL costs, which when one compared with C2 costs excludes interest on value of owned fixed capital assets (excluding land) and rental value of owned land (net of land revenue). Furthermore, C2 costs, when compared with C3 costs, is not adjusted for appropriate valuation of human labour and also excludes imputed value of management input. The MSP declared for Rabi 2018, as claimed by the Finance Minister's Budget speech of 2018, is already above cost plus 50 percent if one considers A2+FL costs. But, falls short if one takes C2 costs and far away from C3 costs.

Serpent-tail

Crop production is a risk-taking enterprise. This is particularly so in large parts of rainfed India that is exposed to the vagaries of weather as also market shocks (both for inputs as also produce).

In a recent exercise, one observed that the real income growth for farmers between 2002-03 and 2012-13 was only 1 percent. This was at a time when real income growth for the economy remained in the range of 7-8 percent. These does call for interventions in agriculture leading to reduction in costs, lowering of risks, increase in net returns, and assurance for better livelihood of farmers.

Concluding remarks

One wonders, which is the constituency that will be addressed even if cost plus 50 percent is effective. To be effective, efforts should not only be made to increase its reach. Furthermore, it should also not be a lip service by taking A2+FL costs; rather, C3 costs should be taken into consideration. What is more, these efforts should be part of a larger exercise in agriculture that reduce costs, lower risks, increase returns and assure better livelihood of farmers. In its current form, one is not sure whether the fire spat will douse discontent or add to the farmers' woes. In other words, two negatives when added becomes a greater negative force. Chimera is a chimera.

Appendix 1: Cost concepts and their components
Costs	Components
A1	Includes (i) value of hired human labour, (ii) value of hired bullock labour, (iii) value of owned bullock labour, (iv) value of owned machinery labour, (v) hired machinery charges, (vi) value of seed (both farm produced and purchased), (vii) value of insecticide and pesticide, (viii) value of manures (owned and purchased), (ix) value of fertilisers, (x) depreciation on implements and farm buildings, (xi) irrigation charges, (xii) land revenue, cesses and other taxes (xiii) interest on working capital, and (xiv) miscellaneous expenses (artisans et cetra).
A2	Includes cost A1 plus rent paid for leased-in land.
A2+FL	Includes cost A2 plus imputed value of family labour.
B1	Includes cost A1 plus interest on value of owned fixed capital assets (excluding land).
B2	Includes cost B1 plus rental value of owned land (net of land revenue) and rent paid for leased-in land.
C1	Includes cost B1 plus imputed value of family labour.
C2	Includes cost B2 plus imputed value of family labour.
C2*	Includes cost C2 adjusted to take into account valuation of human labour at market rate or statutory minimum wage rate whichever is higher.
C3	Includes cost C2* plus value of management input at 10 percent of C2*.
Source: Directorate of Economics and Statistics