Friday, December 19, 2014



Tejinder Narang
Government “fixes” MSP of 24 agro commodities (paddy, wheat, oilseed, pulses, coarse grains, cotton etc.) before the onset of Rabi or Kharif season based upon the recommendations of an expert committee called CACP(Commission for Agricultural Costs and Prices) constituted in 1965. (For example Rabi report FY 2015-16 of CACP   “recommends” the price of wheat in July 2014 about 10 months in advance—while the harvest and marketing will commence in April- May 2015. Thus recommending/ fixing irreversible value of grains, in anticipation, that takes 100-110 days to finally mature in stresses of hot, cold and rainy climate is a futile exercise. More so when market dynamics may be totally different after about 12 months. The logic given is that farmers have to take sowing decisions based on the offered price or the price discovered by the Government.
The determinants upon which CACP rely have a time lag up to 3 years, because data of previous year takes time to be updated. For example MSP of 2015-16 may be based upon inputs up to FY11 or FY12 collated from different states. Is it not an absurd state of affairs?
 The concept of MSP policy itself and the way it is calculated, both are fundamentally flawed.
Price or prices of commodities cannot be “fixed”.  Prices do fluctuate and have to fluctuate. When a commodity is treated and traded in the market, only then the price is discovered. The rest is all speculation. Pricing cannot be a bureaucratic exercise in the chambers of Krishi Bhawan or by discussion with farmers and state governments. The latter are “interested parties”. Announcement of MSP is thus a speculative view of the Government to manage the commodity markets.
 Values of a commodity “vary” at the “time of transaction” on “marked to market basis” depending upon multiple factors of supply- demand within and outside a country, competing origins, environmental factors, geopolitical situation and currency parities etc.
Furthermore, India’s MSP (Minimum Support Price) is always an ascending road model with no scope for downside correction –at least no so far. With lower crude prices of 40% as of today, declining land values, cheaper fertilizers, lower transportation cost and rapidly cooling rate of inflation, is it not logical that MSP of commodities be lowered than previous year. If not, then conceptually MSP is a sham.
At harvest time—say in April-July for wheat—there are abundant supplies in the market.  Logically prices should moderate or touch the bottom. But procurement of 90% of market arrivals by the Government at MSP in two months, firms up the market.  30 million tons of annual wheat purchases inject about Rs 43500 crores or $7 billion with farmers in 60 days. This sudden rush of liquidity with farmers creates inflationary pressure in the economy.
 Focussed procurement of paddy and wheat has de- incentivized output of other crops like oilseeds. More water guzzling crops, higher imports of edible oil and declining export of oil meals, disparity in export prices of corn and cotton are the visible outcome.
MSP becomes sacrosanct for state governments for indulging in profligacy of procurement for corn, barley or any other item at above the market price for rent seeking with no question asked. Formal procedure of purchases by tenders is dispensed.  Hiring of warehouses and then disposal at lower prices provide an avenue for milking the exchequer.
The commonly held view that farmers will be deprived of MSP (better values) if PDS model is disbanded is devoid of facts. Only 8% of the farmers are beneficiaries of this system. (Refer my earlier article in FE on 13.12.2014- If 92% of India’s farmers can operate open market what is the rationale of retention of such a discriminatory arrangement.
How can a Nation of 3.3 million sq km; with 90% land area and 10% water spread over 29 states can attain or have uniformity in cost of production parameters.  Factors of production --land labour, capital, fertilizer and other inputs-- shall have wide disparities in India’s colossal space but MSP is derived on average weighted basis (see graphic). This is defending the indefensible even if some correction factors are applied. The weighted average formula is an illusory mechanism. ( Discussion Paper No. 7 of CACP of June 2013 –“Pricing, Costs, Returns and Productivity in Indian Crop Sector during 2000s” by Ashok Vishandass with B. Lukka .


Though CACP may claim that it determines MSP after detailed analysis of  demand and supply, cost of production, International price trends,  inter-crop price parity etc. -- still the skewness prevails as referred in CAG report of 7th May 2013 (see the chart)  The skewness in 2006-2012 varies between 29 to 66% for wheat and 14 to 60% for paddy. Gross and net profits in wheat during 2006-12 have been significant (graphic).

 MSP of wheat of Rs 1450 qtlfor 2015-16 carries net margin of 22% ( comprehensive cost is Rs 1191-CACP Rabi report of 2015-16).For considering international price parity CACP’s reference point is US SRW wheat at Rs 1580/qtl—which is absolutely naive. It should be Black Sea wheat around Rs 1400/qtl.
Ideally CACP should have recommended reduction in MSP of wheat when excess stocks are stuck with FCI/agencies—while it followed ritualism of annual increase, though marginal. The blame game then shifts to the Food Ministry for its inability to liquidate 10 million tons of stocks as mandated by the PMO.
How to discover the price?
Imperativeness of dismantling MSP cannot be denied or evaded. However as first step, Indian futures/spot markets, even if they are imperfect can be used for estimated price discovery and can be supplemented by e-tendering for precision purpose on daily basis when the procurement is made on mega scale. Farmers can work directly or through arthiyas, brokers and commission agents for e-tendering for the physical sale to the Government agencies. Crop insurance scheme may be put in place for extreme exigencies.
 When the country is in full readiness for income support subsidization through Jan Dhan Yojna, Government may have to unwind itself from Public distribution System and let the private players take over and deal with farming community at all levels.

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