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• Government’s decision to hike MSP for kharif crops is expected to impact GDP by 0.1-0.2 per cent besides adding to inflationary pressures.

Two significant announcements in the 2018-19 budget:

• Decided to keep MSPs at least 50 per cent above the sum of cost of production (A2) – A2 is a comprehensive cost and includes paid or imputed costs of all purchased or own inputs like seed, fertiliser, manure, bullock labour and machine labour, interest on working capital, irrigation expenses, depreciation, rent paid for the leased-in land, costs of repair and miscellaneous expenses.
• Imputed wages for the time spent by the farmer and his/her family (FL) in crop production.

Was this hike required?

• This hike in MSPs was required, given the current adverse conditions of prices and operating conditions of the farm sector, and is a key component of the prime minister’s goal of doubling farm incomes by 2022, which, in itself, is a must for sustaining an 8–9% GDP growth for India. However, MSP increases are, largely, a short-term fix and must be viewed in conjunction with other legs of the strategy. If the other components of the strategy are not implemented with urgency, the associated macroeconomic costs will be a significant drag on overall economic growth.

Immediate Costs:

• All set to impact international price of rice and cotton—items topping list of agricultural commodities exported from the country – hike is expected to firm up cotton prices in India, largest exporter of natural fibre, and reflect in global market soon
•  The move is expected to lead to higher inflation and widen fiscal deficit because of increase in food subsidy bill to over Rs 2 trillion from Rs 1.70 trillion provided in the Budget for 2018-19.
• Higher MSPs will add to inflationary pressures, fiscal slippage and this might prompt the central bank to go for another rate hike.
•  For RBI, MSP increase poses an additional risk to their inflation view, besides fiscal slippage worries and higher oil prices.
• At a time when godowns are bursting with rice stocks and acreages under this water-intensive crop ought to be brought down, the latest increase will compound problems as well as be environmentally unsustainable

What is MSP?

• MSP is a direct market intervention by the government to check distress sale by guaranteeing a fixed price in event of fall in price in open market.
• In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price.

Prices announced

• Before each summer and winter cropping season

On the basis of the recommendations of

• Commission for Agricultural Costs and Prices (CACP)

Determinants of MSP till now:

•  Cultivation costs
•  Demand-supply and market price dynamics
•  Inter-crop price parities
•  Terms of trade between agriculture and non-agriculture sectors
•  Implications on consumer inflation

Introduction of a single pre-determined principle

• Henceforth, MSPs will be set at 1.5 times the production cost. The higher the cost, the more is the MSP.
• Farmers growing crops consuming more water and energy, with their production costs naturally higher, get rewarded through increased MSPs.
• And when there is assured procurement and payment as well, it results in more production of paddy and sugarcane — even if at increasingly uncompetitive prices globally.

Effect on Crops

• Expected to firm up cotton prices in India, largest exporter of natural fibre, and reflect in global market
•  Although MSP covers just normal rice, it will push up price of basmati rice as well
• The higher assured price under MSP for paddy will encourage farmers to grow normal rice instead of basmati from next year in the country
• MSP will check cotton exports from India and ensure domestic supply during current season – The substantial increase in the price of cotton is expected to activate multi- national companies in domestic market as exports of raw cotton will be unviable now
• The increase in MSP will increase acreage under paddy, a crop that require substantial quantity of groundwater for irrigation.

Conclusion:

•  It is time for India to switch from price policy to income policy approach to redress farmers’ distress. India needs to devise an income policy (DBT) for farmers.
•  Rather than opting for big ticket reforms, the government needs to look at marginal improvements. These, if consistently implemented over time, will deliver the required change. The system lacks the skill to diagnose its own incompetence. An independent commission of farmers must be constituted to review government programmes, which are supposedly benefiting the farming community.
• There has been a lot of farm distress and measures have been taken to alleviate these problems, this being one of them. This move was something that was necessary, but needs to be implemented in the right way to ensure they get what they need, to be able to cover up for the costs.
• While it is desirable to intervene in the markets when they fail to deliver remunerative prices to producers, excessive intervention in prices can have serious implications for the functioning of market, fiscal resources and imports and exports. The best prices for farm produce can be realised from a competitive market. This requires regulatory reforms, institutional changes, and the development of appropriate infrastructure to promote evolution of agricultural market system.
• A tendency is developing in the country — to hold the Centre responsible for the problems, and solutions, related to agricultural prices. The stakeholders need to differentiate areas for action by the Centre and the states. There is a particular need to put pressure on the states to undertake the required reforms to make agricultural markets more efficient, competitive and responsive to the needs of producers and consumers. State government needs to strengthen the procurement infrastructure in states like Bihar and Uttar Pradesh where grain purchase is dominated by private players and remuneration is much less than the assured price.