Tag: C2 costs

Three Farm Bills and India’s Rural Economy

With low levels of farmers’ income and a lack of assured price mechanism, what impact will the three farm bills have in the long term on India’s agrarian economy. Here’s an analysis.

Last week, the Union government passed three bills to replace the three ordinances that were enacted during the COVID-19 lockdown. These three bills, expected to bring revolutionary changes to agrarian context and help double farmers’ incomes are: The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020; The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill, 2020 and The Essential Commodities (Amendment) Bill, 2020.

Taken together, according to the prime minister, these bills are expected to usher in a revolutionary change in the arena of Indian agriculture and would go in some way, perhaps a long way, in doubling the incomes of the farmers. We need to understand these legislations and their long-term impact on the agrarian structure against the expectation outlined by the government to see to what extent this policy prescription will go in doubling of farmers’ incomes and what kind of revolution will now be on the anvil.

As per census 2011, 96 million cultivators enumerated farming as their main occupation, down from 103 million in 2001 and 110 million in 1991. Still 46% of the workforce is working full-time in farmlands. The size of the operational holdings for small and marginal farmers has shrunk from 1.15 hectares in 2010-11 to 1.08 hectares in 2015-16, according to provisional estimates of the 10th agriculture census 2015-16, and small and marginal holdings constitute almost 90% of our total agricultural land holdings.

Another striking feature of India’s agriculture is the continuing trend of increase in the numbers of small holdings in the country. The first agricultural census done in the beginning of the 1970s reported that figure at 71 million. In the last five decades, those numbers have grown exponentially from 138 million in 2010-11 to 146 million in 2015-16, as per provisional estimates of agriculture census 2015-16.

In other words, the average size of operational holdings has considerably reduced from 2.28 hectares in 1970-71 to 1.15 hectares in 2010-11, and 1.08 in 2015-16, shows data.

What is more worrying is the fact that the top 10%  of the households are now cultivating almost 50% of India’s total cultivable lands whereas the bottom 50% are cultivating less than 0.5% of India’s cultivable lands. The decline in the India’s bottom 50% land holdings is steady. The table below is rather self-explanatory of the plight of the farming sector households.

Table 1: Percentage of land cultivated by bottom 50% and top 10% of rural households
1987–88 1993–94 1999–2000 2004–05 2009–10 2011–12
bottom 50% 4.1 3.8 2.7 1.9 0.8 0.4
top 10% 48.6 47.9 49.6 48.9 50.3 50.2

Low income levels

Given the state of holdings and the fact that two-thirds of them are in dry land farming areas of the country it is not surprising that the average income levels for the farming households and individuals are extremely low. As per various estimates from governmental sources, the average income of a farming household stood at a mere Rs 8,931 per month in 2016-17.  This would roughly translate into slightly over one lakh rupees for a year.

What is alarming is the fact that almost 35% of the income has come from the wages. There is little reason to believe that the above figures have changed. Overall, we can safely state that almost 85% of our farmers fall in the category of marginal and small farmers with less than two hectares of land holdings. It is against this crucial factor that we need to understand the legislations passed and the impact they might have on the very structure of our agrarian edifice.

Farmers block a railway track as they participate in ‘Rail Roko Andolan’ during a protest against the farm Bills at village Devi Dass Pura, September 24, 2020. Photo: PTI

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill seeks to completely open up the sale of produce outside the Agricultural Produce Market Committees, or the APMCs. It not only creates an e-highway for trading and transactions, but also creates a structure for e-trading of agriculture produce. Farmers are allowed to sell their produce outside of the APMCs, and that creates a possibility for more competition and better pricing for farmers. In other words, the market is thrown completely open for the private players to come in the agriculture sector and deal directly with the farmers.

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill creates a framework for contract farming. It provides a template at the national level of farming agreements, with regard to agribusiness, processing, and the entire range of services including wholesalers, exporters and large retailers for sale of farming produce at a mutually pre-agreed price.

The Essential Commodities (Amendment) Bill takes away cereals, pulses, oilseeds, edible oils, onion and potatoes from the list of essential commodities. Therefore, these commodities are now free of the Essential Commodities Act restrictions and stand deregulated. However, the central government has retained the right to regulate them under extraordinary circumstances, such as in case of a war, famine, natural calamity, and impose stock limits if there is a steep rise in prices.

Put together, this package of legislations seeks to open up the farming at both ends – production (through contract farming) and sale (through complete deregulation). So, what are the implications of such an act?

Also read: Farm Bills Will Create a Vacuum That May Result in Utter Chaos: P. Sainath

Trust deficit

Reforms are not new to the agrarian sector. According to eminent economist Himanshu, in almost 18 out of 36 states and Union territories, agricultural reforms in the form of permitting private markets have already been allowed. More than 20 states have allowed contract farming, and around 19 states have enabled direct purchase of agricultural produce from the primary producer by ‘processor/bulk buyer/bulk retailer/exporter’.

What is important to note is the fact that farmers have welcomed these changes in these states and many of them were suggested by the Centre in the past. The fear, therefore, of the newly enacted legislations being opposed just because the central government has proposed these are unfounded. Today the fear is that the complete opening up of the sector would throw all the marginal farmers, who incidentally are 85% of the total farming cohort, to the mercy of private players. There is also a crisis of confidence and a trust deficit between farmers and the government.

Farmers protest against the passage of new farm Bills in the parliament and land legislations proposed by the Karnataka government in Bengaluru, September 22, 2020. Photo: PTI/Shailendra Bhojak

The reasons for such a deficit to exist are not too far to seek. In 2015, the government in an affidavit filed in the Supreme Court in response to a public interest litigation stated that the recommendation of the Swaminathan Commission on the minimum support price (MSP) for agricultural produce to be more than 50% of the cost of production cannot be accepted. It stated: “A mechanical linkage between MSP and cost of production may be counter-productive in some cases. No comparison can be made about increase or decrease of price of one commodity as compared to other commodities as the same depends on demand and supply and market forces.”

It further added: “It may be noted that pricing policy i.e. the fixing of MSP is not a ‘cost plus’ exercise, though cost is an important determinant of MSP. The pricing policy seeks to achieve the objective of fair and remunerative price and is not an income policy.” So effectively the critical recommendation of the Swaminathan Commission stood rejected by the Union government as early as in 2015!

The Swaminathan Commission had recommended a 50% increase on the comprehensive cost borne by the farmer – the C2, but the Union government had taken into account only the cash transactions and the payments made by the farmer on seeds, labour, pesticides and fertilisers (A2) plus unpaid value of family labour (FL) – the A2+FL. It completely ignored the rent on the owned land as well as the interest on the owned capital, which, if taken with A2 and FL would become the C2. Thus, even the existing structure is not as per the recommendation of the commission.

For more than four decades, more farmers are not able to recover even the basic cost of cultivation from their farms. The overall fiscal commitment to agriculture is drastically curtailed. The investments in the sector are at a standstill, and if one applies the factor of inflation, then these would stand in the negative.

Also read: Farm Bills, Small Farmers and Chasing the Agri-Dollar Dream 

Conclusion

Farmers are debt ridden, starved of funding and of assured price mechanism. The three legislations if taken together accentuate the crisis even further. In the absence of a guaranteed support price mechanism, the legislations even fail to mention a very strong support for the MSP as a benchmark price as a fundamental condition for open agriculture trade and winding up of mandis.

For years farmers have demanded statutory support price for their produce from the government. The question is what is the base level of that income that will be taken for it to double and to what?

There is a need to restore the shaken confidence of the agrarian sector. In order for that to happen the government of India needs to give an iron clad guarantee on holding the price line 100% over and above the inflation-linked cost of production to the primary producer and not allowing any players to offer a price below that line to them. Only such a guarantee will ensure the confidence of the farmers in the system.

We need to understand that if the country has to come out of her grave economic crisis, the answer does not lie in the economies of the urban or of the extractive economies of the capital. The answer decisively lies in the revival of the rural with dignity and respect. The country, it must be understood, cannot survive if the rural falls and chances of such an event happening today can only be averted with a considered policy response initiated with empathy and care.

Vijay Jawandhiya is a senior farmer leader and an avid commentator on the agrarian crisis and Ajay Dandekar is a historian and has worked on the issue of agrarian crisis.

Exclusive: Centre Rejected MSP Hike Recommendations by Several BJP-Ruled States

Official documents obtained by The Wire also revealed that, due to different cultivation costs of various crops in different states, a single MSP was unable to meet the demands of farmers.

New Delhi: Before parliament’s budget session began, President Ram Nath Kovind, in his address to the joint session of parliament on January 31, said that the Centre is working with dedication to provide farmers with prices that are 1.5 times the input costs. He further stated that a steady increase in the minimum support price (MSP) for kharif and rabi crops is a step in this direction. However, the president’s claim does not match the reality of MSP as recorded in official files.

Official documents obtained by The Wire under the Right to Information Act reveal that several state governments, including those of BJP-ruled states, had not agreed to the MSP of crops decided by the Central government and had demanded changes.

According to government records, the Centre is paying 1.5 times the cost of the crops on the basis of A2+ FL instead of paying it on the basis of C2 as recommended by the Swaminathan Commission and demanded by the state governments.

A2 + FL cost includes all cash transactions and payments made by the farmer, including the cost of family labour. It also includes the rental value of the leased land. C2 includes A2 + FL cost as well as rent of owned land and interest on owned capital.

On July 3 last year, the cabinet approved the MSP for kharif crops for 2019-20. As compared to 2018-19, there was a slight increase of 3.7% in the MSP of paddy, 4.9% of jowar, 2.6% of millet, 3.5% of maize, 1.1 % of moong, 1.8% of urad, and 2.0% of cotton.

Under the chairmanship of Prime Minister Narendra Modi, the cabinet approved the MSP of crops based on the recommendations of the Commission for Agricultural Costs and Prices (CACP) of the Union Ministry of Agriculture. However, documents reveal that the governments of Chhattisgarh, Haryana, Maharashtra, Rajasthan, Uttar Pradesh, Puducherry, Tamil Nadu, Odisha and Karnataka opposed this.

In fact, comments from the governments of Tamil Nadu and Karnataka were not included in the cabinet note despite the fact that they were received before the cabinet meeting. A cabinet note is an important document on the basis of which the cabinet decides on any subject.

Also read: Government Announces Marginal Increase in Rabi Crop MSP

If all crops falling in the purview of MSP are included, the margin of total profit is only 14% over cost C2. That is, the MSP has been decided by adding only 14% to the cost C2.

Official documents also reveal that due to different cultivation costs of various crops in different states of the country, a single MSP is unable to meet the demands of farmers across different states. As a result, many states have raised objections.

West Bengal

Responding to a letter dated April 22, 2019, sent by the Union agriculture secretary Sanjay Agarwal, the West Bengal government wrote on May 8, 2019 that the CACP had recommended the MSP for paddy at Rs 1,815 per quintal against the Rs 2,100 per quintal proposed by the state based on its assessment.

West Bengal asking for the MSP of paddy to be increased.

Citing the state’s calculations, joint secretary of the state agriculture ministry Jitendra Roy wrote, “The Estimated C2 Cost of cultivation of paddy in West Bengal during 2017-18 was Rs 1,751 considering Minimum Wages as declared by the Department of Labour, Govt. of West Bengal. Considering an average increase @9% in cost of various inputs and labour charges, the projected C2 Cost of cultivation of paddy in West Bengal during 2019-20 is Rs 1,909.”

On the basis of this assessment, the West Bengal government had requested the Centre to increase the MSP of paddy to Rs 2,100 per quintal instead of Rs 1,815 per quintal. However, the government did not accept the state’s recommendation.

Chhattisgarh

Similarly, the Chhattisgarh government had also demanded that the Centre increase the MSP, in its letter dated May 3, 2019. In the three-page letter, the state agriculture department had calculated the cost of major kharif crops in detail and asked for an increase in the MSP.

Incorporating several aspects in the cost such as cost of labour, interest on land, rent of leased land, expenditure on guarding, and expenditure on transportation, the state government recommended an increase in the MSP of paddy, ragi, maize, arhar, moong, urad, groundnut, soybean, sunflower and sesame to Rs 2,500, Rs 3,100, Rs 1,800, Rs 6,800, Rs 7,300, Rs 6,800, Rs 5,800, Rs 3,800, Rs 6,500 and Rs 6,500 per quintal respectively.

Production costs assessed by the Chhattisgarh government.

Contrary to the demand of the state, the Centre has fixed the MSP at significantly lower rates for the above mentioned crops, that is, Rs 1,815, Rs 3,150, Rs 1,760, Rs 5,800, Rs 7,050, Rs 5,700, Rs 5,090, Rs 3,710, Rs 6,485 and Rs 6,485 per quintal respectively.

On the MSP recommended by the CACP, the government of Chhattisgarh wrote “The price recommended by the Commission is much lower for different crops as compared to the proposal of the Government of Chhattisgarh. Therefore, in crops where the MSP is less than the proposal sent by the state government, take necessary action to determine the MSP as proposed by the state government in column no. 3.”

Also read: Kharif MSPs Increased Marginally; Paddy up 3.7%, Tur 2%

After the Centre rejected the MSP as proposed by the state, the Chhattisgarh government demanded a bonus on paddy. However, the Centre viciously opposed it saying, that if the Chhattisgarh government offered a bonus on paddy, the Centre would not buy it.

Women working in the rice paddy fields. Credit: Trócaire/Justin Kernoghan/Flickr

Women working in the rice paddy fields. Photo: Trócaire/Justin Kernoghan/Flickr

Maharashtra

The former BJP-Shiv Sena government of Maharashtra led by Devendra Fadnavis had also raised objections against the MSP of Kharif crops as decided by the Centre.

On May 17, 2019, the secretary of the state agriculture department Eknath Davle sent a letter demanding an increase in the MSP, in which he wrote, “On March 29, 2019, the state government sent a letter with recommendation and proposal on the MSP. But the MSP fixed for kharif crops by the CACP is much lower than those proposed by the state government.”

The letter further added, “Therefore, you are requested to consider the earlier proposal sent by the Maharashtra government and increase the MSP for kharif crops.”

The then-Fadnavis government had recommended that the MSP of paddy, jowar, millet, maize, arhar, moong, urad, groundnut, soybean, sunflower and cotton be increased to Rs 3,921, Rs 3,628, Rs 4,002, Rs 2,001, Rs 6,161, Rs 9,943, Rs 8,556, Rs 9,416, Rs 5,755, Rs 7,534 and Rs 7,664 per quintal respectively. This amount was much higher than the MSP decided upon by the Centre.

Meanwhile, the Centre had already warned that no state would offer bonus on the MSP that has been fixed as it would lead to market distortion.

Haryana

On similar lines, Haryana, another BJP-ruled state, also demanded an increase in the MSP for kharif crops. The state said that the MSP recommended was not even equal to the cost of cultivation.

After examining the CACP report, the state agriculture department said in its letter, sent on May 18, 2019, “It is pertinent to mention that the price of diesel, pesticide, fertiliser, machines and other inputs has increased this year as compared to the previous year. Lower availability of labour is also a major contributor in increasing the cost of cultivation.”

The letter further stated, “The proposed pries by CACP are too less compared to increased cost of cultivation in the State of Haryana. Haryana is the major producer of rice in the country. CACP recommended the MSP of two varieties of paddy at Rs 1815 and 1835 per quintal for the year 2019-20 which is only Rs 65 per quintal increase from last year MSP.”

The Department of Agriculture and Farmers Welfare, Haryana, rejected the MSP recommended by the CACP and said that it was not in line with the increase in the cost of cultivation. The Khattar government had demanded that the Centre fix the MSP of paddy at Rs 2,677 per quintal instead of Rs 1,815 per quintal.

In its two-page letter, the Haryana government said, “MSP recommended by CACP is not commensurate with the enhanced cost of production on account of rise in input cost in the state. Therefore, the MSP of paddy should be at least to Rs 2,650-2,750 per quintal in the best interest of the farmers of the State of Haryana.”

Also read: Why MSP at 1.5 Times Cost Is Another Empty Promise for Farmers

Describing the distressing economic situation of farmers in rain-fed areas, the Haryana government wrote that bajra is the main crop using less water and is better suited for such areas but the MSP fixed by the Centre for millet is quite less.

The letter stated, “Department of Agriculture and Farmers Welfare has estimated the input cost for the crop as Rs 2,170, but the CACP has recommended Rs 2,000 per quintal as the MSP. Thus, the recommendation for MSP of Bajra from the state is that it should be Rs 2,200 per quintal.”

Haryana Govt. letter to inc… by The Wire on Scribd

However, the government did not increase the MSP for millet.

It is the same for maize. The state government wrote in its letter, “This crop is an important cereal crop and fodder crop yet its area and production have steadily decreased due to low MSP.

It is noteworthy that states like Haryana and Punjab are currently facing a terrible water crisis due to rampant cultivation of paddy. Therefore, the state government is focusing on crops other than paddy which require a lesser amount of water.

Offering the suggestion that maize cultivation may be used in the direction of water conservation, the state government said, “Maize requires lesser quantity of water as compared to Paddy and its cultivation should be encouraged on the grounds of water conservation and crop diversification.”

The letter stated, “The state government is making strong efforts for diversification of Paddy to Maize crop, therefore, we need strong support for increasing the MSP of this crop for adoption by the farmers.”

However, according to the state, the MSP recommended by the Centre does not even cover the cost of cultivation.

The state said, “CACP has recommended Rs 1,760 per quintal which is very less and does not even cover the cost of cultivation. The MSP of Maize should be fixed at Rs 2,350 per quintal.”

Citing a rise in the cost of production due to increased pest attacks, the Khattar government asked the Centre to fix the MSP of cotton at Rs 7,000 per quintal instead of Rs 5,255. MSP for the cotton crop is not adequate to cover the costs, the letter said.

In addition, the Haryana government proposed that the MSP of other crops like Arhar, Moong, Urad, and Groundnut may be fixed at Rs 7850, Rs 9500, Rs 7400 and Rs 6600 per quintal respectively.

A veiled woman farmer harvests a wheat crop in a field on the outskirts of Ajmer in Rajasthan, April 4, 2015. Credit: Reuters

A veiled woman farmer harvests a wheat crop in a field on the outskirts of Ajmer in Rajasthan, April 4, 2015. Photo: Reuters

Rajasthan

Responding to a letter dated April 22, 2019, sent by the agriculture ministry regarding MSP fixed by the Centre, the Rajasthan government issued a letter on May 13, 2019 expressing its disapproval of the MSP recommended by the CACP and demanded to raise it citing the increased cost of cultivation in the state.

The state government wrote in its missive, “Due to most part of the state being a desert region and owing to adverse rainfall conditions, the cost of crop cultivation is higher as compared to other states.”

Also read: Budget Fails Yet Again to Present a Roadmap to Increase Rural Demand, Double Farmers’ Income

As a result, the Rajasthan government demanded an increase in the purchase price of millet, maize, soybean, urad and moong. The state government recommended that the MSP of millet should be fixed at Rs 2,200 per quintal instead of Rs 2,000 per quintal as fixed by the government of India.

In addition, the state demanded an increase in the MSP of maize (from Rs 1,760 to Rs 2,650 per quintal), soybean (from Rs 3,710 to Rs 4,500 per quintal), Urad (from Rs 5,700 to Rs 6,200 per quintal) and Moong (from Rs 7,050 to Rs 8,601 per quintal).

In a letter addressed to the Union agriculture secretary Sanjay Agarwal, Rajasthan chief secretary DB Gupta wrote, “Since the state of Rajasthan has an important place in the country in terms of both sowing and cultivation of these crops, kindly do the needful in giving priority and importance to the MSP proposal sent by the state in determining the minimum support price of these crops.”

However, the Centre did not accept the demands made by the state.

Uttar Pradesh

The Yogi Adityanath government of Uttar Pradesh also disapproved of the MSP of kharif crops proposed by the Centre for 2019-20 season recommending the MSP be fixed according to the cost of production of the state. This was revealed by a 12-page confidential letter issued by the UP government obtained by The Wire.

In its letter to the Ministry of Agriculture, the state government said, “The main basis for determining the minimum support price of crops is their cultivation cost. The cultivation cost of crops depends on expenditure incurred on human labour, animal labour, machine labour, land rent and agricultural investment, etc. used in cultivation.”

The UP government had demanded an increase in the MSP citing the reason that since the state had a large number of small and marginal farmers, the size of land holdings was very small and the farmers were unable to fully utilise resources and agricultural investments.

According to the state government, there are 92.81% small and marginal farmers in Uttar Pradesh. The size of land holdings was merely 0.73 hectares and for marginal farmers, it was only 0.38 hectares.

Documents obtained by The Wire reveal that there is a huge difference in the CACP and the UP government’s estimation of cost of cultivation owing to which the state government had sought an increase in the MSP.

Up government’s estimated cost of cultivation.

The Uttar Pradesh government carried out an estimation of the cost of cultivation under Director of Agricultural Statistics and Crop Insurance, along with agricultural economists of agricultural universities. The state had included many aspects in the cost of cultivation such as human labour, machine labour, cost of medicines, insurance premium, rent of land, as well as interest.

Based on this, the state assessed the Cultivation Cost (C2) of paddy to be Rs 1,679 per quintal and recommended the MSP to be Rs 2,520 per quintal. However, the Centre assessed C2 of paddy at Rs 1,619 per quintal and fixed the MSP at Rs 1,815 per quintal only.

Also Read: Farmers’ Losses Mount to Rs 1,000 Crore as October Prices Fall Short of Kharif MSP

The cost of cultivation projected by CACP for other crops is higher as compared to that of the Uttar Pradesh government. But the MSP proposed by CACP is much lower than the state government proposed prices. The reason is that CACP has fixed the MSP on the basis of A2 + FL (which is much lower than C2) instead of C2.

The UP government had recommended to set the MSP at Rs 2,265, Rs 2,225, Rs 6,225, Rs 6,375, Rs 5,855, Rs 5,390, Rs 4,245 and Rs 6,660 per quintal for bajra, maize, urad, moong, arhar, groundnut, soybean and sesame respectively.

However, the Centre rejected the recommendations of the state.

The state government wrote, “Keeping in mind that the majority of the state’s population is dependent on agriculture and related activities, the minimum support price should be announced as per the cost estimated by the state agriculture department so that the farmers can get remunerative prices for their crops and the migration of farmers from agricultural region can be curtailed.”

Tamil Nadu

The Tamil Nadu government said that the proposed MSP of kharif crops for 2019-20 season was not adequate to fulfil the needs of the farmers.

In a letter dated June 24, 2019, the state government reasoned, “Factors such as annual rainfall, water availability, release of water from dams and fluctuation in its cost, and perennial rivers ceasing to flow play a crucial role in determining cultivation cost.”

The state further wrote, “With regard to pulses, low production and higher minimum support price of other food grains has pushed the cultivation of pulses to the margin. Therefore, the production of pulses can be encouraged by increasing their MSP.”

The Tamil Nadu government said: “The cost of production alone does not determine the minimum support price. Factors like social and economic condition of farmers should also be kept in mind so that the farmers can be given a dignified life.”

On this basis, the state government recommended the MSP as Rs 2,700, Rs 2,750, Rs 2,150, Rs 3,150, Rs 2,100, Rs 6,300, Rs 7,700, Rs 6,200, Rs 5,400 and Rs 6,200 for paddy, jowar, bajra, ragi, maize, tuar (arhar), moong, urad, groundnut and cotton respectively.

A farm worker harvests maize crop in a field on the outskirts of Ahmedabad, India, February 1, 2019. Credit: REUTERS/Amit Dave

A farm worker harvests maize crop in a field on the outskirts of Ahmedabad, India, February 1, 2019. Photo: REUTERS/Amit Dave

In addition, the state government had demanded that the MSP of Extra Long Staple (ELS) cotton be fixed between Rs 9,000 to Rs 10,000 per quintal. The state government said that there is a need to set a separate minimum support price of ELS cotton so that cotton farmers may be encouraged to grow the crop.

Also read: Almost 75% Farmers Did Not Get All 3 PM Kisan Instalments, a Year After Implementation 

However, the Centre did not accept the state’s recommendations.

Odisha

Expressing disapproval over the MSP recommended by the Centre, the Odisha government said that the CACP’s report revealed that the government’s price recommendations were based on A2 + FL cost whereas the state had suggested doing so on the basis of C2 cost which is a better representation of the cost of production.

In a confidential letter sent on July 1, 2019, the state government said, “Odisha being a major paddy growing state and having a robust procurement mechanism it is felt that its farmers would be hardly benefitted out of such marginal increase in MSP for Paddy.”

Letter sent by the Odisha government demanding an increase in the minimum support price for kharif crops.

Based on practical assessment of the cost of production in the state, the Odisha government recommended that the MSP for paddy be fixed at Rs 2,930 per quintal. Similarly, for maize, ragi, arhar, moong, urad, groundnut and sunflower, the following prices were recommended: Rs 1,800, Rs 3,000, Rs 5,900, Rs 7,400, Rs 5,850, Rs 5,140, and Rs 5,500 per quintal respectively. For cotton, the MSP was recommended at Rs 5,350 and Rs 5,650 per quintal.

The Centre, however, ignored the recommendations.

Karnataka

In a letter dated June 29, 2019, the then-Karnataka government advised the Centre to fix the MSP at one and a half times of C2 based on the recommendation of Swaminathan Commission and rejected the MSP decided by the Centre.

On the basis of information collected online from farmers by the Karnataka Agriculture Price Commission (KAPC) since 2016, the state government said that the cultivation cost assessed by them was much lower than the cost estimated by CACP.

The state government said, “The MSP fixed for the 2019-20 season is inadequate compared to the state’s cultivation cost. Because of this, the profit margin of the farmers is either little or negative.”

Comparing the cultivation cost and MSP, the state wrote that in case of arhar the MSP is not even equal to A1 + FL cost, due to which farmers do not seem to benefit at all.

Since, leasing land is not legally approved in Karnataka, A1 and A2 costs are the same.

The Karnataka government wrote, “If the C2 cost assessed by KAPC is included then the profit margin for crops other than maize and moong will become negative. Considering the implementation of one MSP across the country, if C2 cost is counted instead of A1 + FL cost, it would solve the problem of inequality in cultivation cost in all states of India.”

Keeping these aspects in mind, the state government said that considering the cost of cultivation of the state, a bonus should be given to the state government over the proposed MSP to compensate the farmers. The letter further read, “Therefore, the CACP’s assertion that giving bonuses causes distortion in the market should be reconsidered.”

Also read: Will PM-Kisan Eventually Evolve and Replace Farm Subsidies During Modi 2.0?

Besides, the state government in its 10-page letter also suggested other solutions for problems related to agriculture. However, the Centre did not accept the recommendations of the state. As a result, the state government announced in December last year that they would give a bonus of Rs 300 per quintal on the MSP of Arhar.

According to the data presented in the Lok Sabha recently by the Ministry of Consumer Affairs, Food and Public Distribution, the Food Corporation of India (FCI) has purchased a total of 333.42 lakh metric tonnes of rice and 341.32 lakh metric tonnes of wheat across the country till 30 January 2020.

Translated from Hindi by Naushin Rehman. You can read the Hindi version here.

Government Announces Marginal Increase in Rabi Crop MSP

The government has claimed that the increase is in line with the principle of setting MSP at ‘cost plus 50%’ but this claim is misleading.

New Delhi: The Cabinet Committee on Economic Affairs (CCEA) on Wednesday announced the annual increase in minimum support prices of rabi crops for the 2020-21 marketing season. 

The MSP of wheat has been increased by 6% to Rs 1,840 per quintal, while that of lentils has increased 5% to Rs 4,475 per quintal. Barley too has seen a minor increase of 2% to Rs 1,440 per quintal.

The maximum hike was for safflower, the MSP of which has been increased 20% to Rs 4,945 per quintal. 

The government has claimed that the increase is in line with the principle of setting MSP at “cost plus 50%”. But this claim, as The Wire has pointed out in the past, is misleading. The government is able to claim that MSP is 50% more than cost by setting the lower of two costs between A2+FL (actual paid out cost plus imputed value of family labour) and C2 (comprehensive cost including imputed rent and interest on owned land and capital). 

The Swaminathan Commission on farmers had recommended in 2006 that the higher of the two costs – C2 – be taken as base when the MSPs are set. It suggested that the MSP be at least 50% higher than C2. The implementation of these recommendations was promised by BJP before the 2014 Lok Sabha elections. 

The government, though, has used A2FL as the base for setting MSP and claimed that it has fulfilled its election promise by setting MSP at cost plus 50%. But the MSP for most crops had already been giving farmers returns of over 50% the A2FL cost. 

Also read: Why MSP at 1.5 Times Cost Is Another Empty Promise for Farmers

This practice has continued in this season’s announcement and the claim that MSP is 50% higher than the cost of production continues to be misleading. 

The difference between A2FL and C2 costs can be substantial. For the 2019-20 marketing season, the Commission for Agricultural Costs and Prices – whose job it is to determine the costs of production and recommend the MSP to be set – has shied away from publishing the data for C2 costs. 

But, if a comparison is made between the A2FL and C2 costs for the 2018-19 season, for which C2 data was published, it is clear that the difference between A2FL and C2 costs is substantial. For instance, the difference is the least, at 27%, in the case of safflower. 

In the case of wheat, a major rabi crop which has a good procurement network in parts of north India, the difference between A2FL and C2 costs is 53%. For lentil the difference is 57%. 

As is evident, if C2 costs are taken as base, as the Swaminathan Commission had recommended and as the BJP had promised prior to the 2014 elections, the MSP will have had to be substantially higher than what they are in order to be 50% more than the C2 cost. 

There’s No Reason to Be Confused on How to Calculate the Right MSP

The Swaminathan Commission was clear in its recommendations, and the rationale offered by the NITI Aayog to rule out the use of comprehensive cost is dubious at best.

The Swaminathan Commission was clear in its recommendations, and the rationale offered by the NITI Aayog to rule out the use of comprehensive cost is dubious at best.

The curious thing is that there was never any real ‘confusion’ on this matter. Credit: Simone D. McCourtie/World Bank

The curious thing is that there was never any real ‘confusion’ on this matter. Credit: Simone D. McCourtie/World Bank/Flickr CC BY-NC-ND 2.0

Finance minister Arun Jaitley had announced in Budget 2018-19 that his “government has decided to keep MSP [minimum support price] for the all unannounced crops of kharif at least at one and half times of their production cost”.

This announcement set off a flurry of discussion over the type of cost upon which the MSP would rise by 50%. It could be the A2 cost (which is just the paid out cost) or the A2+FL cost (which is the sum of paid out cost and the imputed value of family labour), or the C2 cost (which is the sum of paid out costs, imputed value of family labour, interest on the value of owned capital assets, rent paid for leased-in land and the rental value of owned land).

What primarily added to this confusion is that Jaitley had not clarified one way or the other in his Budget speech.

Consequently, many commentators started arguing that this confusion was probably real. For instance, senior journalist Harish Damodaran wrote that the National Commission on Farmers (NCF), headed by professor M.S. Swaminathan, which gave the original recommendation, had never specified the cost over which there should be a 50% premium.

Perhaps trying to build on or clarify this ‘confusion’, Ramesh Chand, a member of the NITI Aayog, suggested that the government will not be using C2 cost, but [A2+FL] costs for the fixation of MSP in 2018-19. Chand is quoted in the Economic Times as saying:

“In my view, the government will take A2 plus FL, to give margin of 50% for consideration of MSP. The rationale for this is that rental value of own land which is included in C2 is not incurred by 88% of the farmers.”

Jaitley himself, finally, gave the clarification. Speaking in parliament on February 9, he stated: “My understanding is that this will be over [A2+FL] cost of production.”

The curious thing is that there was never any real ‘confusion’ on this matter.

Also read

The NCF was constituted in 2004 in the background of suicides by thousands of farmers across the country, and the larger agrarian distress that was sweeping the countryside. Five reports were submitted to the government between December 2004 and October 2006. The recommendation related to the fixation of MSP appeared in the fifth report titled ‘Serving Farmers and Saving Farming: Towards Faster and More Inclusive Growth of Farmers’ Welfare’. Over different parts of this fifth report, the NCF refers to the importance of MSPs to ensure viable farming. On page 57 of the report, the recommendation is provided that:

“Expand the MSP system, based on the cost of production including reasonable rate of return on investment and ensuring a prompt and open-ended purchase for all major crops.”

On page 63 of the report, there are two recommendations:

“Announce the MSP for a wide range of crops of importance to PDS [public distribution system] before sowing, taking into account the recommendations of CACP”; and

“Fix the procurement price at the time of harvest, taking into account the prevailing market price. The procurement price will take into account the cost escalation in inputs like diesel, since the announcement of MSP.”

The key recommendation that we are currently discussing appeared on page 256:

“The Minimum Support Price (MSP) should be at least 50% more than the weighted average cost of production. The “net take-home income” of farmers should be comparable to those of civil servants.”

According to Damodaran, while the NCF report spoke of the “weighted average cost of production”, it did not specify what it should contain.

What he ignores is that the NCF report itself, as well as presentations based on the NCF by Swaminathan, had indicated that the “weighted average cost of production” referred to in the fifth report was the C2 cost.

For instance, there is a detailed empirical discussion on page 74 (Annexure 2.2) of the fifth report. Comparing data on [A2+FL], C2 and MSP for 2005-06, it was noted: “C2 cost (cost of production per quintal) is not covered by the MSP in most States for the 12 crops”. In page 84, this discussion is summarised in the sentence: “It would be extremely unlikely that in long run farmers would continue to cultivate those crops where the C2 costs are not recovered.” The recommendation on the 50% hike in page 256 was based on such a detailed discussion on the non-recovery of C2 cost.

The Swaminathan Commission mentioned that they were referring to C2 cost when making their recommendation. Credit: Navaneeth Kishor/Flickr CC BY 2.0

The Swaminathan Commission mentioned that they were referring to C2 cost when making their recommendation. Credit: Navaneeth Kishor/Flickr CC BY 2.0

If doubts still remain, one may refer to another document of the NCF. On October 4, 2006, when Swaminathan met the Union minister for agriculture to submit the fifth report, he had given a PowerPoint presentation summarising his recommendations.

The 22nd slide of this presentation, a copy of which is with this writer, was titled “Assured and Remunerative Marketing”. The first point in the slide (see screenshots below) was:

“Calculation of Minimum Support Price (MSP) – Cost [C2] + at least 50%”

Swaminathan had also tweeted out his formula on September 28, 2017.

One hopes that the “confusion” on the cost concept recommended by the NCF is put to rest. There is no confusion – it was C2 plus 50%.

Finally, the economic rationale offered by NITI Aayog’s Chand to rule out the use of C2 cost is dubious at best. That 88% of farmers do not lease in land is no reason to not consider rental value of owned land as an imputed cost. An imputed cost is an opportunity cost. An opportunity cost, by definition, is not an actual paid-out cost. For a farmer cultivating own land, the land could always be not self-cultivated and rented out, thus earning a rent. This opportunity cost is in no way dissimilar to the imputation of family labour at the market wage rate. In the latter too, the farmer is not actually earning a wage outside the farm; yet, it constitutes a wage lost because the farmer forgoes it and chooses to cultivate his/her own farm.

That Chand would allow one opportunity cost to stay (the imputed value of family labour) and not another (the rental value of owned land) makes very poor economic sense. Jaitley appears to be following this flawed economic rationale.

R. Ramakumar teaches economics at the School of Development Studies, Tata Institute of Social Sciences, Mumbai.

With Latest MSP Promise, the False Narrative Surrounding Costs and Farmer Incomes Continues

The need of the hour is to set up a farmer pay commission, which can fix a minimum assured income of a farmer household.

The need of the hour is to set up a farmer pay commission, which can fix a minimum assured income of a farmer household.

While the initial MSP budget announcement sparked excitement, more realistic assessments soon weighed in. Credit: Reuters

About halfway during the budget speech – while announcing the government’s plans for dealing with India’s agrarian crisis – finance minister Arun Jaitley made a rather bizarre statement. Apparently, according to Jaitley, the Modi government has already provided more than 50% margin over cost of production for most crops this rabi season.

To further portray and label this budget as pro-farmer, he announced that the government will implement the prime minister’s promise of fixing minimum support price (MSP) at one-and-a-half times the cost of production. The moment I heard this announcement, I remembered a day three years ago (February 21, 2015, to be precise) where the Centre gave an affidavit in the Supreme Court where it stated that the government would not be able to enhance MSP for agricultural produce to be 50% more than the input cost. The affidavit stated that “prescribing an increase of at least 50% on cost may distort the market. A mechanical linkage between MSP and cost of production may be counter-productive in some cases…”

While the initial MSP budget announcement sparked excitement, more realistic assessments soon weighed in. After all, Jaitley’s claim that the government had already provided more than 50% margin over cost of production for most crops this rabi season was an exaggeration at best.

The M.S. Swaminathan committee had recommended fixing MSP at one-and-a-half times the cost of production and the-then prime ministerial candidate Narendra Modi had latched on to this, making it his poll promise in 2014. Swaminathan had mentioned in his report that the MSP be 50% over “costs of cultivation”. Now, while Swaminathan did not clear the air as to which benchmark was used to calculate“costs of cultivation” at that juncture, the annexures of the report make it clear that he used ‘C2 costs’ to calculate net farmer returns.

Also read: Why MSP at 1.5 Times Cost Is Another Empty Promise for Farmers

In agricultural parlance, ‘A2’ is the actual paid out cost (includes all expenses in cash and kind on account of hired labour including human, bullock, machine, seed, insecticides, pesticides, manure, fertilisers, irrigation charges and miscellaneous expense).

‘A2+FL’ is the actual paid out cost plus imputed value of family labour. And ‘C2’ is A2+FL+ the rental value of owned land and interest on owned fixed capital.

Hence, there is no ambiguity that when Modi was wooing the farmers of India in 2014, he was promising 50% profit over C2 costs. However, agriculture minister Radhamohan Singh has now said that “It’s going to be A2 plus FL. Land rental is a myth. Let’s begin first with a 50 percent mark-up on expenses incurred.”

Such statements are a clear indicator that Modi government has cleverly tried to create a false narrative, that the government has indeed walked the talk regarding their poll promise of 2014 by giving 50% profit over “cost of production” to the farmers.

But, then devil lies in the details. Consider the difference between ‘A2 + FL’ and ‘C2’ costs for wheat.

Data from the ‘Commission of Cost and Pricing’ for the rabi season 2018-19 shows that ‘A2+FL’ for wheat is Rs 817/quintal and a 50% profit over A2+FL will amount to Rs 1225.50/quintal, whereas the MSP set by Modi government  for the rabi season 2018-19 is Rs 1735/quintal.

Now, if the farmers were getting Rs 509.50/quintal more than the ‘price recommended by Swaminathan report’, why were the farmers on the street? Why was the prime minister crying himself hoarse over implementation of Swaminathan report in 2014 when the UPA  too was giving 50% profit over A2+FL as MSP?

The answer to this question is that farmers wanted that Swaminathan report be implemented in letter and spirit – that is, 50% profit over C2 costs.

Let’s take the same example of wheat. Data shows that C2 for wheat is Rs 1256/quintal and a 50% profit over C2, will amount to Rs 1884/quintal. And remember, the MSP set by the Centre for the rabi season 2018-19 is Rs 1735/quintal. If the government indeed considers C2 as the “cost of production” and the produce is procured at MSP , the farmer will get Rs 149/quintal more for his wheat crop. However, the farmer will not get a paisa extra in case  ‘A2+FL’  is considered as the “cost of production”.

Similarly, if we factor in 50% profit over ‘A2+FL’ costs for paddy, the farmer will get Rs 125.50/quintal extra over the current MSP of  Rs 1550/quintal and if we factor in 50% profit over C2 Costs for paddy, the farmer will get Rs 676/quintal extra.

Also read: Uttar Pradesh’s Hot Potato: Another Farm Crisis Ignored

Since, dedicated buying is only done for wheat and paddy, we can safely say that India’s farmers will only get some extra money if, and only if, the Centre considers C2 costs as the “cost of production”.

We also need to remember that, according to Shanta Kumar committee, only 6% of the farmers are able to sell their produce at MSP.  So, even if we assume, that the government will retract their position and set the MSPs by considering 50% profit over C2 costs, then also 94% of the farmers will not benefit.

What will happen to the majority of farmers, who have small land holdings of ~0.6 acres, who have no marketable surplus and have little or no access to institutional credit?

It is being said that the government is planning to launch a new “market assurance scheme” with a corpus fund of Rs 500 crore under which states will procure crops if prices fall below the MSP. Under this scheme, states will procure crops (except wheat and paddy) at the MSP, as notified by the government of India if prices fall below it.  Now, the million dollar question is whether Rs 500 crore is enough for bailing farmers out – especially when the value of oilseeds and pulses was Rs 2 lakh crore in 2014-15 and the total value of vegetables and fruits was over Rs 4.5 lakh crore in 2014-15.

The government had set up a committee under the chairmanship of Ashok Dalwai with a clear cut goal of raising the average incomes of agricultural households from Rs 96,703 in 2015-16 to Rs 1,93,406 in 2022-23 (measured at 2015-16 prices). This committee inferred that, in order to double farmer income by 2022, an additional investment of Rs 6.4 lakh crore will be required. But in this year’s budget, the allocation has increased, by only Rs 4,845 crore. There has been a deafening silence in the budget about the means of generation of this huge sum of Rs 6.4 lakh crore. Such omissions show the lackadaisical approach of the government toward the mammoth task of doubling the farmer income by 2022.

The need of the hour is to set up a farmer pay commission, which can fix a minimum assured income of a farmer household. It is the duty of the government to ensure that the difference between the stipulated income arrived by the commission and the farmer’s monthly realisations are credited directly to the farmer’s bank account. This will be “sabka sath sabka vikas” on ground, in real terms.

Ramandeep Singh Mann is an engineer by training and writes on agricultural and farmer issues.