Agriculture Policy

Raising MSP to Levels Demanded By Protesting Farmers Will Feed Inflation, Cause Shift in Cropping Patterns, Two Economists Say

If minimum support prices (MSP) were to be 50 percent above comprehensive or C2 cost, as the protesting farmers of Punjab are demanding, the relative prices of crops would change causing shifts in cropping patterns observe economist Ashok Gulati and his research associate Manish Kumar Prasad in an article in the Indian Express.

Comprehensive cost includes all cash expenses on seed, fertilisers, pesticide and wages. In addition, it encompasses the imputed value of family labour, the rental value of  own land deployed for cultivation, depreciation on farm implements and buildings and interest on own fixed capital used for farming. It is wider than A2+FL cost, which comprises paid out costs and the notional value of family labour. Currently, MSP has to be at least 50 percent above A2+FL cost.

Gulati and Prasad find that raising MSP for the 23 commodities for which MSP is currently declared will lift them by 25 percent on average above their 2023-24 levels.

Safflower MSP will go up by 40 per cent (or Rs 2,260 to Rs 7,910 per quintal), but sugarcane’s FRP (fair and remunerative price) will go up only by 3 per cent to Rs 324 per quintal.  Wheat MSP will be higher by 9 per cent or Rs 191, and mustard by 8 per cent or Rs 436, as their existing MSPs are already well above cost A2+FL plus 50 per cent margin. For other crops, MSP increases would be: Sesamum (37 per cent or Rs 3,195), sunflower (32 per cent or Rs 2,163), soybean (31 per cent or Rs 1,426), groundnut (26 per cent or Rs 1,658), paddy (31 per cent or Rs 677), jowar (33 per cent or Rs 1,050), maize (29 per cent or Rs 606), ragi (30 per cent or Rs 1,153), tur (28 per cent or Rs 1,960), moong (27 per cent or Rs 2,311), urad (35 per cent or Rs 2,433), gram (25 per cent or Rs 1,334), and lentil (14 per cent or Rs 840). Commercial crops’ MSP will also go up. That of medium staple cotton will rise 24 percent to Rs 8,209 an increase of Rs 1,589 per quintal

These MSP hikes would change the relative prices of these crops and could prompt shifts in cropping patterns. Wheat and sugarcane are likely to lose area, while paddy surpluses may go up significantly. This may force higher MSP hikes in wheat and sugarcane than indicated by the C2+50 per cent formula.

When soybean and maize get costlier, so will poultry, fish and milk products as the two commodities are used as animal feed. More area will come under the 23 crops, reducing that of vegetables and horticulture, which though profitable have volatile markets. Overall inflation might rise by 20-30 percent, the authors say.

High MSPs will hit agro-exports. When rice becomes costlier by 31 percent, exports will be come unviable, adding to domestic supplies, and depressing local prices. Traders will not buy at high MSP, obliging the government to pick up more grain than is needed for distribution through ration shops.

The author say their sympathies are with the farmers, who deserve a better prices for their produce. For this, they suggest the removal of export controls and stocking limits on traders, and a halt to the unloading of rice and wheat by the Food Corporation of India below thier economic cost (that is MSP plus interest, waterhousing and transportion costs).  They say the government must strengthen and free up futures markets, options, warehouse receipt systems, and encourage Farmer Producer Organisations (FPOs) to be part of organised value chains or digital commerce. In brief, the government must “get the markets right”and . intervene only when there is a sudden price crash. For that, an augmented stabilisation fund could be used as a last resort, and not the first instrument.

(Top photo of a nigerseed field in bloom by Vivian Fernandes)


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