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BANISH THE BANE OF
MSP
CONCEPTULLY WRONG AND COSTING MESSED UP.
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.
CONCEPTYLLY WRONG
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- http://goo.gl/T0gMgj)
If 92% of India’s farmers can operate open market what is the rationale of
retention of such a discriminatory arrangement.
COSTING MESSED UP
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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