MSP revision for 14 kharif crops to benefit farmers, says India Ratings

The government’s move to increase the minimum support price (MSP) for 14 kharif crops, officially declared last week, will partially benefit farmers,  finds a study by rating agency India Ratings and Research (Ind-Ra).

In the analysis, Ind-Ra looked at the agricultural gross value added in MSP for rice and wheat as a proxy for agricultural growth. It considered growth in agricultural wages as a proxy for an increase in input prices between 2003-04 and 2017-18.

Between 2003-04 and 2007-08, the rural economy faced low wage growth and high growth in agricultural output, which meant farmers earned higher margins. 

Whereas from 2008-09 to 2012-13, there was a relatively similar growth rate in agricultural output but a higher rural age growth rate eroded some of the gains that farmers had received in the previous period. 

On the other hand, since 2013-14, there has been moderate growth in agricultural output, “indicating thin margin growth for agricultural activity,” says Ind-Ra. 

Between 2009-10 and 2012-13, margins for farmers increased significantly but has fallen since 2013-14. For rice farmers, their margins increased 82.3 per cent in 2009-09 to 2012-13, and fell to 38.6 per cent during the following period. In 2014, the government announced that it would revise the MSP for crops on the basis of adding 50 per cent to the costs as suggested by the National Commission on Farmers. 

This was headed by MS Swaminathan. 

However that has not been adhered to as the Government's revision to the Kharif MSP is based on the A2+FL (cost of production) formula which does not take into farmers' account rentals and interest foregone on owned land and fixed capital assets. 

Ind-Ra says the move will benefit farmers as the MSP for rice fell below the price calculated based on 1.5x of A2+FL, during FY2014-18.  

"The announcement of MSP at 1.5x of A2+FL cost may placate farmers to some extent but will not be enough. Furthermore, the 1.5x formula may not work in the case of wheat, as MSP levels in all three periods were already higher than 1.5x of A2+FL cost," says Ind-Ra. 

Between FY2009-13 the MSP for price was higher than the 1.5x  A2+FL price. 

If the C2 formula for arriving at the cost of production is the basis for calculating the new MSP, farmers' margins would be significantly lower than A2+FL cost during FY14-FY18, with the rice margin turning out to be as low as 6.2 per cent, said Ind-Ra.