New MSP and its impact on TIP of India

Will New Minimum Support Price (MSP) impact Trade, Investment & Politics(TIP) of India?

By:

VIJAY SARDANA

International Agribusiness & Trade Law Expert

Email: sardana.vijay@gmail.com

Blog: Vijay Sardana Online

The agriculture sector in India is vital to provide food security and meaningful employment in rural India.

In the recent years, the developments in marketplace clearly indicate that policies like MSP, eNAM, etc have little significance on farmers welfare and market is government appearing helpless in front of vested interest by vested interested created and operating under APMC Act in various states. They have no consideration or desire to follow the rules and policies created by the government of India for farmers welfare. Most of the AMPC market yard under the control of government does not respect MSP and not willing to trade on eNAM platforms. This, on one hand, making government interventions ineffective and on the other hand force inflation on the economy. Successive Governments who should control these players and enforce the laws seems either losing control of these elements or have no desire to enforce the policy decisions either due to political compulsions or lack of political will.

Minimum Support Price and Farmers welfare:

Farmers should get a fair price for their produce. Every production system has two types of costs variable or operating cost and fixed cost. In agriculture system, we calculate operating cost as a direct purchased input cost, plus family labor and hired labor plus interest on working capital, this is called (A2+FL).  

Another cost element is a fixed cost which included depreciation of farm machines, implements, building and lease rent of the land and related costs. Farmers take a loan to create these assets and they use this to ensure crop productivity is ensured. 

If we add variable cost (A2+FL) with this fixed cost it becomes comprehensive cost (C2).

Now, the fact is consumers must pay the total cost. Any welfare state or responsible government must ensure that market forces do not exploit farmers and must ensure a that farmers do get a fair price for their crops. This fair price must include profit for farmers hard work and the risk he takes to ensure food security for the country. It means the fair price of produce must be higher than C2.

Unfortunately, since the independence of India and even till date we are exploiting farmers and natural resources in the name of welfare of consumers. This is sad that elected government of socialist and democratic welfare state is not willing to consider either fair price or comprehensive cost for farmers (C2) to decide Minimum Support Price.

See the example:

Crops	A2+FL (2018-19)	C2 (2018-19)	MSP (2018-19) Announced based on (A2+FL)	Return over C2 cost*	Return over (A2+FL) cost	As per Farmer Commission (C2+50%)
Arhar (Tur)	3432	4981	5675	14%	65.36%	7472
Bajra	990	1324	1950	47%	96.97%	1986
Cotton (Medium Staple)	3433	4514	5150	14%	50.01%	6771
Groundnut	3260	4186	4890	17%	50.00%	6279
Jowar-Hybrid	1619	2183	2430	11%	50.09%	3275
Maize	1131	1480	1700	15%	50.31%	2220
Moong	4650	6161	6975	13%	50.00%	9242
Niger seeds	3918	5135	5877	14%	50.00%	7703
Paddy Common	1166	1560	1750	12%	50.09%	2340
Ragi	1931	2370	2876	21%	48.94%	3555
Sesamum	4166	6053	6249	3%	50.00%	9080
Soybean (yellow)	2266	2972	3399	14%	50.00%	4458
Sunflower Seeds	3592	4501	5388	20%	50.00%	6752
Urad	3438	4989	5600	12%	62.89%	7484
* Farmers' Commission recommended Return over C2, not return over (A2+FL)
Analysis by : Vijay Sardana

If we go by government claim, the return is more than 50%, but according to author the actual gain to the farmer is between 10 to 20% only. Is this gain enough to take care of the needs of farmers’ family?

So, it is clear that this MSP will not make any difference to living standards or farmers. Rural poverty and distress cannot be address by these MSP calculations.

It is my suggestion, the time has come we should scrap the method of MSP and come out with an out-of-box approach to compensate farmers with meaningful returns. In free market economy and in globalized market MSP will not be a useful tool.

Implications of the revised MSP on international trade and customs duties:

When world commodities market are going down and we are raising MSP, this will destroy the competitiveness of the Indian economy and agro-based industries. It means out a target to reach USD 100 billion in agro-exports is not possible unless we ensure very high quality and innovative products from India.

Can our soymeal oil meal industry remain competitive with increased MSP?

See the Example:

Commodity	New MSP	Current International price
Maize	Rs. 1700/qtl	Rs. 1227/qtl
Sunflower seeds	Rs. 5388/qtl	Rs. 2900/qtl
Soybean seeds	Rs. 3399/qtl	Rs. 3031/qtl

It means, export competitiveness of Indian agriculture sector is eroded and many important commodities cannot be exported. This will further suppress the domestic prices and will increase the burden of the government to support these farmers with “bhavantar scheme” (to pay the difference between MSP and ruling market price).

IN many cases, chances are that even imports may go up. To check the reverse flow of the commodities government must rework customers duty with immediate effect.

Agro-based industries will have a tough time:

Industries based on Cotton, soybean, groundnut and other oilseeds, maize will have to work out a way to sustain their profitability under new MSP regime.

Can cotton based industry absorbed 25% hike in MSP and also ensure export competitiveness?

Can livestock industry compete against imported aquaculture and poultry products with increased MSP of maize and soybean?

Scrapping all laws adding to transaction cost is the way forward :

In order to pass on the benefit of MSP to the farmers, Government must relook at all laws adding cost to value chains. The government must remove all legal hurdles and remove all multiple players from the value chain by law which are they're only to collect rent and spoil the efficiency as well as quality in the value chain.

All laws which are more than 10 years old must be either reviewed or scrapped. Indian cannot fight global trade war with outdated laws and rules of the closed economy era.

Central government leaders must show the same pollical will what was done for GST. Leaving to states and giving excuses that it is a state subject will only create more problems for the national economy and farmers welfare.

Reform in agriculture sector is the biggest test for cooperative federalism. Can political leadership show the vision, courage and desired to overcome this hurdle to support Indian farmers and protect the rural economy from collapse. If not, this revised MSP will remain a paper document with no economic benefit to the farmers. This is time to show leadership by those who want to make a New India.