Budget announcements on the farm sector: Markets, not MSP, is the focus

Analysts and observers are debating on how the cost of cultivation will be calculated

The Budget announcements on the farm sector, especially the one that commits to ensure a minimum support price (MSP) for crops that is equal to 1.5 times the cost of production — which the Swaminathan Commission Report had recommended in 2006 — raised many eyebrows. Analysts have been debating how the cost of cultivation will be calculated, and whether the cost — A2+FL, which includes actual expenses in cash and kind, including rent paid for leased-in land along with imputed value of family labour—will be considered or the more comprehensive cost C2, which includes imputed rent for the owned land, interest on owned fixed capital, and imputed value of wages to labour, will be considered to calculate the MSP.

 
Government officials say ‘A2+FL’ has been considered as the cost inherent in the Budget announcement. As most crops already have MSP close to 30 per cent over the cost of production, experts say the MSP commitment might not matter much. What would make a difference is ramping up of agricultural market infrastructure — not just for crops, but for animal husbandry and fisheries as well. Reinvigorating rural primary markets — Gramin Agriculture Markets or GrAMs — as aggregating centres, which flows directly from the recommendations of the DFI (Doubling Farmers’ Income) Committee, is a step in that direction.
 
As the name suggests, MSP is the minimum price required as support to farmers at times when market prices falls, and not as a direct determinant of their improved incomes. But the cost of production used to calculate the MSP is dated, and there is no mechanism to accurately determine it in real-time. In any case the MSP for 12 among 20 major crops (14 kharif and six rabi) is more than 30 per cent above the cost of production for the 2017-18 agricultural season (see chart 1). It was over a 40 per cent margin over cost of production in the year 2016-17, according to a DFI Committee report.
 
That apart, gross returns over production cost—the gross value of output minus ‘A2+FL’ cost—for major crops in the two periods 2009-10 to 2011-12 and 2012-13 to 2014-15 have exceeded a margin of 50 per cent, with some regional variations where margins have been low (see chart 2). They were as high as 172 per cent for paddy in Haryana, and 114 per cent for arhar (pigeon pea) in Madhya Pradesh, and as low as minus 8 per cent for bajra (pearl millet) and minus 1 per cent for urad (black gram) in Maharashtra for the latter period.
 
Government officials insist MSP is but a support price, and it is the market that should provide better price for farm produce. Most price realisations below the MSP are due to the supply glut in APMC mandis immediately after harvest.
 
A National Sample Survey Office (NSSO) conducted the Situation Assessment Survey of Farmers indicate that while incomes from cultivation grew 35 per cent in the 2003-13 decade, incomes from animal husbandry grew 200 per cent. Further, real incomes per cultivator rose 66 per cent in the period from 2004-05 to 2011-12, while it remained stagnant from 2012-13 to 2015-16, according to a paper by Ramesh Chand, member of NITI Aayog (see chart 3). Another 2016 NITI Aayog study noted that only 21 per cent of farmers in the study expressed satisfaction over the implementation of the MSP policy.
 
With a focus on funding agriculture market infrastructure and offering a 100 per cent tax benefit to Farmer Producer Organisations (FPO), finance minister Arun Jaitley’s recommendations in the Budget aims to ensure better remunerative prices through markets and not the MSP mechanism. Intermediate storage structures and aggregation centres are required to reduce price volatility associated with ‘lumpiness’—or sudden increase in a small period—of supply. This is where market infrastructure becomes instrumental in realising better prices for farm produce. The DFI Committee report provides a detailed picture of the same, and draws a road map for the establishment of GrAMs announced in the Budget. 
 
Among the big contributors to the DFI Report, Pawanexh Kohli, CEO & chief advisor, National Centre for Cold-chain Development, says fragmentation of land is not the cause of stagnant farm incomes, but fragmentation of crop output is. Only aggregating hubs like GrAMs will enable the flow of market intelligence from the consumer to the producer and enhance the value of harvested agricultural produce, which is currently left to the mercy of supply-demand dynamics in over-regulated district mandis.
 
The DFI Committee has recommended establishment of 70,000 PRAMs (renamed GrAMs in the Budget) in the country one each for 10 villages. The Budget announced establishment of 22,000 such markets, which will be connected by roads, electricity and the internet.
 
A recent study by Chand, Shivendra Srivastava and Jaspal Singh proves that in 40 years from 1971 to 2011, the share of agriculture in rural economy fell from two-third to one-third. “The share of labour in the cost of production rose faster than the growth in value-added in agriculture post 2007, and mechanisation has not seen a robust development to effect substantial reduction in labour costs,” Srivastava, a professor of agriculture economics and the co-author of the report, told Business Standard. He added that MSP is a necessary but not a sufficient condition to ensure doubling of farmers’ incomes. “Income from livestock, crop diversification, improving farmers’ terms of trade are equally necessary.”