The issue of minimum support price will always be mired in controversy. Ideally, the market should be setting the price with all checks at manipulation being in place. However, in our complex society, farmers are a major constituency from the political standpoint as well as suppliers of basic inputs for the rest of the economy. It is not just the share in GDP that matters but also the purchasing power provided for other industries being linked directly with other sectors. Besides, the mandi system is opaque and farmers are at a disadvantage when they enter these markets. Therefore, price intervention is required.

The MSP is set by the CACP (Commission for Agricultural Costs and Prices) and is normally active for rice and wheat at all times where the FCI is the procuring agency. For other crops, while MSP is announced, it becomes active when there are cooperatives or state agencies procuring the product based on circumstances.

This is because market prices would normally be higher than MSP and the machinery for procurement, storage and disposal is weak. Hence, while oilseeds or cotton are procured in limited quantities, in general the market is the place for sale. In the last couple of years pulses were also in the procurement loop while sugar has also featured at times.

Good in principle

The Government’s announcement to increase the MSP to 1.5 times the cost is laudable as it ensures that the farmers get a higher price and income. It has, however, not been clarified whether the cost being referred to is the A2+FL concept which is actual cost plus farm labour or the C2 concept which is comprehensive and includes interest paid, rent, etc. The table tabulates these concepts for eight kharif crops for 2017-18 and juxtaposes the MSP with the costs as well as those with the new multiple. Further, the market price has been placed alongside, which is the lowest average monthly price between September and January for the country based on AGMARKNET data. The observations are quite revealing.

The table shows that for the present kharif crop the market prices have been lower than the MSP for five of the eight crops with the exceptions being paddy, soybean and cotton. Paddy is the surprise element because the market price is higher for a product which has an active and efficient procurement system. Second, the MSP has been placed higher than the A2+FL cost and is at least 20 per cent higher. For cotton and moong it is between 20 and 30 per cent, while for paddy, maize, soybean and groundnut it is 30-40 per cent, and almost 60 per cent for tur and urad. Third, for five of the eight products, the MSP is higher than the C2 cost concept.

The Government now needs to make clear what is being referred to when we speak of 1.5 times the cost — A2+RL or C2? Using the former would mean making some upward revisions for the crops. However, if C2 is being used then the increase would be substantial as the market price to C2*1.5 multiple would be upwards of 1.5 times the current market price.

Delivery matters

Pricing is one part of the story but delivery is more important. Higher prices would mean a radical change in the way in which farm products are marketed.

To begin with it would be necessary to create structures where the Government — Central or State — gets involved with procurement of crops. Volumes would be large as almost all the kharif crops now rule below the MSP since production has been very good. Therefore, organisations for procurement have to be identified; these will have collection centres across all the markets. Ideally, they should be located at all mandis where the crops are sold.

Second, procurement is always for an average fair quality. This would require some grading and assaying to ensure that sale takes place to the Government. For rice and wheat the manual inspection system has been established; the same has to be developed for other crops.

Third, the Government should be able to have warehouses ready to store the produce as even today the handling of rice and wheat stocks faces several challenges.

Fourth, once procured, disposal becomes important. In the case of rice and wheat, there is direct linkage with PDS and buffer stock, and hence a system has been established. What does one do with, say, groundnut or maize? Will the Government become the seller of agri products because once procured, the product has to be sold or stored?

How about compensation?

A way out is to not procure but to compensate the farmer with the difference between the price received at the mandi and the MSP. But given that there are intermediaries along the way, the farmer may get bypassed in such a transaction. Besides, mandis are opaque, with records not being maintained. This can be gauged by the numbers on arrival of crops noted on the AGMARKNET website which, at best, covers 20-30 per cent of the total marketable surplus of any commodity.

These issues are pertinent because merely announcing MSPs may not make a material difference unless all the accompanying questions are addressed. At present, as the table shows, the market price is lower than the MSP. Yet farmers are not able to get the MSP as there are no channels existing for them.

Curiously, even though MSP for rice is lower than the market price, the FCI continues to procure (admittedly quality issues would account for a large difference between the two prices).

While the new proposal has elicited more comment on the cost to the Government, to make these higher MSPs meaningful it has to be ensured that all the systems are in place to procure and then dispose of the same. Otherwise it will be a plan only on paper.

The writer is the chief economist at CARE Ratings. The views are personal

comment COMMENT NOW