Agriculture Policy Briefing

MSP Raises Alone Will Not Sustain Higher Farm Incomes Unless Yields Improve and Costs Fall

The government’s MSP policy ignores the importance of enhancing productivity to reduce costs and improve farm incomes. It incentivizes environmentally unsustainable rice cultivation in Punjab. The MSP increases would have influenced planting if they had been announced a month ago. Overall, it shows that the government is acting in panic ahead of elections in several BJP- ruled states and the Lok Sabha elections, reports Vivian Fernandes.`

The increase in minimum support prices (MSPs) are welcome to the extent that they encourage the cultivation of socially-useful crops like pulses, oilseeds and millets, but the increase ranging from Rs 200 to Rs 220 a quintal respectively for common and Grade A rice would militate against weaning a state like Punjab from growing a crop which is environmentally-unsustainable for it.

The increases are 50 percent to 98 percent above A2+FL cost or expenses paid in cash and the imputed cost of family labour. The government would like to pass this off as the redemption of a promise made in the budget and a first for farmers. Both the claims are misleading. Farmers wanted application of the formula suggested by the 2004 National Commission on Farmers headed by M. S. Swaminathan, the agricultural scientist responsible for the green revolution.  He had recommended that the floor price for crops should be 50 percent above the cost of production, including cash expenses and the imputed values of family labour, rent for owned land and interest on owned capital, called C2 cost. The MSP increases fall short of that formula. It would, however, have been impractical to implement it because prices would have shot up, provoking a backlash from consumers.

With the latest announcement, the floor price of rice during the term of the present government would have gone up by 33 percent, lower than the 38 percent increase during the second term of the Manmohan Singh government. Singh increased the MSP on jowar or sorghum by 78.5 percent over five years; this government has given a 58 percent raise. For bajra or pearl millet, the increases are 49 percent and 56 percent respectively. So one cannot say that this government has flattered the wallets of farmers more than the previous one.

An increase of 50 percent above A2+FL cost is not novel. Agricultural economist Ashok Gulati who headed CACP (the commission that recommends MSPs) under the Manmohan Singh government has written that the MSPs for all rabi or winter crops in 2013-14 were “way above” A2+FL cost. It was 106 percent higher for wheat and 133 percent more for rapeseed-mustard.

The mere announcement of MSPs will not result in higher incomes for farmers. Of the 23 crops for which the government announces floor prices, there is a proper procurement system only for rice, wheat and sugarcane and that too in a few states. Prices, millets and oilseeds are either not procured or procured in a small quantity. One cannot blame the government, because pulses are not supplied through ration shops, except in Andhra, Punjab, Himachal, Tamil Nadu and Punjab. Pulses do not keep for more than a year. The government is good at buying but bad at disposing of the stocks. It usually sells at a loss either because the timing is wrong or the quality has deteriorated.

Similarly with oilseeds. Groundnut in pods is bulky to stock and the shelled variety will not keep long. It is also prone to aflatoxin contamination.

Procurement prices are supposed to set a benchmark for open market prices but often do not. According to Kuldeep Singh, a Madhya Pradesh-based procurement agent for the national agricultural marketing cooperative, Nafed, summer moong is being bought for Rs. 3,000 a quintal at mandis in the state against the state’s procurement price of Rs. 5,800 a quintal including a bonus of Rs 200. Traders are buying black gram or urad at Rs 2,500 a quintal, less than half of the procurement price of Rs 5,600 a quintal, he says.

Singh suggests that even if the government does not procure it must forbid traders at mandis from quoting a price less than the MSP.

Procurement of oilseeds by the government deprives the edible oil industry of raw material, says B. V. Mehta, Executive Director of the Solvent Extractors Association, an industry lobby, because the stocks are impounded in warehouses. Mehta suggests using import tariffs instead to ensure that prices of oilseeds in the open market do not fall below MSP. That would obviate the need for the government to buy and stock.

Higher floor prices are necessary to encourage cultivation of pulses and oilseeds, which are socially-useful, in the sense that they require little water and also enrich the soil by storing nitrogen from the air in nodules. So farmers should be compensated for the environmental service.  Since India imports urea, the main fertilizer for the plant nutrient nitrogen, these crops also save dollars. And they pare the subsidy bill, as urea is heavily subsidized. Pulses, oilseeds and millets are grown in dryland areas. Social distress will result if their cultivation becomes unviable.

But hikes in procurement prices are not sustainable without yield gains. India’s soybean yield per hectare has ranged from 0.7 tonnes to 1.35 tonnes between 1990-91 and 2015-16. That of Brazil, USA and Argentina in 2016 was 2.5 tonnes, 3.5 tonnes and 3 tonnes respectively. Their scale of production is much higher. This is true of pulses as well.

Raising the MSP for paddy will encourage its cultivation in a groundwater-challenged state like Punjab which has an efficient procurement machinery. What is instead needed is a shift in the cultivation of rice to eastern India. This was the idea behind the programme called Bringing Green Revolution to Eastern India, initiated by Pranab Mukherjee as finance minister in 2010. Because of warmer weather and low rainfall, the yield of rice per unit of irrigation applied is less in Punjab and Haryana than in Jharkhand, Bihar, Chhattisgarh and Odisha, though the two northwestern states produce more rice per hectare than the eastern ones. In the absence of rural roads, mandis and procurement agencies, rice cultivation cannot shift to the eastern states, despite higher MSP.

Farmers need price incentives, no doubt. But those alone are not enough. To sustain higher incomes, farmers need to reduce the cost of cultivation through high-yielding technologies and agronomic practices that turn potential yields into real ones. But for ideological reasons, the government has not approved a mustard hybrid developed by a team of Delhi University scientists which is genetically engineered for higher productivity. Farmers also need access to bank credit so that they are not forced to sell soon after harvest when prices are low, to moneylenders. And they need to be connected to markets as well.

(This article was first published in

(Top photo of migrant workers transplating rice at a field in Haryana, June 2015, by Vivian Fernandes).

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