Macro-economic forecasts and analysis
Real-time analysis of data releases and copious indicator data
The Cabinet Committee on Economic Affairs chaired by the Prime Minister approved an increase in minimum support prices for 2018 kharif crops. In the Union Budget announced in February 2018, the finance minister had promised that MSPs would be at least 150 per cent of the cost of production. Accordingly, MSPs of 14 crops have been increased to ensure that they are more than 50 per cent higher than the cost of production.
Cost of production corresponds to the concept of A2+FL which includes all input costs and cost of family labour. It is not what the Swaminathan committee had suggested which is the concept of C2. C2 includes A2, FL and also imputed rent and interest cost on owned land and capital. Farmer groups have demanded 50 per cent returns over C2. What the government has announced now is more than 50 per cent return over A2+FL.
Nevertheless, the price increases proposed are substantial. The average increase in the MSP is 26 per cent. Except arhar, urad and groundnut the MSP for all crops has increased in double digits.
None of the proposed increase gives farmers any return close to 50 per cent over C2. Bajra could come close at an estimated return of 45 per cent over its estimated C2 cost.
Bajra has been treated exceptionally. Returns over cost of production of this crop would be 97 per cent.
The new MSP of bajra is Rs.1,950 per quintal. This is 36.8 per cent higher than the earlier MSP of Rs.1,425 per quintal. It is also 57.5 per cent higher than the current market price of Rs.1,237.7 per quintal. The implicit cost of production of bajra is Rs.990 per quintal. This implies that the current market price already yields a return of about 25 per cent. But, the government has raised this return to a massive 97 per cent.
Bajra is a late-sowing kharif crop and the announcement could have a major impact on its sowing. Till June 29, bajra sowing this year was 67.5 per cent lower than it was during the similar period last year. In terms of sowing, bajra has been the worst performing crop so far this year. The handsome award given by the government could possibly bring back some of the acreage to the coarse cereal.
Rajasthan accounts for 56 per cent of the area sown under bajra. And, over one-third of the area sown under kharif crops in Rajasthan is under bajra. The impact on the state of Rajasthan evidently could be big this kharif season. Given that Rajasthan is one of the states that will go to polls later in 2018, the political implication of this extraordinary award is inescapable.
Arhar and urad are the two major pulses that have been awarded higher-than 50 per cent returns in the MSP announcement. Like bajra, both these crops have seen low acreage this season and current market prices are very low compared to their prices in the past two years.
Farmers could be enthused by the MSP for arhar which at Rs.5,675 per quintal, is 55 per cent higher than average market price in June 2018. However, the prices are 13.6 per cent lower than a year ago and less than half their level two years ago. Two years ago the price of arhar was Rs.8,698.2 per quintal. The situation is similar for urad. The MSP at Rs.5,600 per quintal is 50.6 per cent higher than the market price of Rs.3,719.4 per quintal. The market price a year ago was Rs.5,327.8 per quintal and two years ago it was Rs.10,488.3 per quintal.
The proposed MSPs for soyabean and sesamum crop may not make any material difference to farmers. The proposed MSP for soyabean is close to its market price and that for sesamum is lower than the market price.
The MSP for maize is 50.3 per cent higher than its A2+FL cost. But, the crop has a much higher C2. As a result, the proposed MSP works out to be about 30 per cent lower than the estimated C2 cost. However, the MSP is 30 per cent higher than the market price.
The proposed MSP of paddy is also only 9 per cent above the current market price. This could have only a marginal impact.
If rains make good progress, sowing of groundnut could improve as the proposed MSP is 10 per cent higher than the current MSP.
While rains have improved after their brief lull, sowing of kharif crops is still quite low. As of end of June these were nearly 21.6 per cent lower than their level a year ago. While the kharif MSPs look impressive, they are unlikely to make a difference to sowing of pulses. Except bajra the impact on other crops could also be only marginal.
Besides, the press release by the government leaves a crucial uncertainty with respect to the implementation of the MSPs. It states “NITI Aayog, in consultation with Central and State Governments, will put in place a fool-proof mechanism so that farmers will get adequate price for their produce.” This implies that the mechanism is not necessarily a government purchase at the MSP and that the mechanism is yet to be worked out in consultation with multiple agencies.
It is pertinent to note here that lack of government procurement was a major cause for farmers’ distress in Madhya Pradesh and Maharashtra in the case of arhar. MSP announcement alone may not be sufficient to meet farmer expectations.