When the cost of crops varies statewise, why is there a common MSP for the entire country?

The central government decides the Minimum Support Price on the basis of average expenditure. Though the state governments can increase the rate of MSP, they don’t. That’s because the central government buys a crop only at its own fixed MSP. So, how is this benefitting the farmers?

Mithilesh Dhar Dubey
| Updated: February 10th, 2020

The total expenditure of paddy cultivation over one hectare in Andhra Pradesh is Rs 80,303. In Uttar Pradesh, the expenditure of paddy cultivation for the same area is Rs 58,429 and in Punjab, it is Rs 76,079. If one looks at the report of the Commission for Agricultural Costs and Prices, not only paddy, the cost of every crop varies from state to state within the country. Then, the question arises, when the costs are varied, how can the Minimum Support Price (MSP) be one?

A minimum support price (MSP) system has been introduced in the country to protect the interests of farmers. Even if the price of crops falls, the central government buys crops from the farmers at the fixed MSP. Through this, the government is trying to curtail farmers’ losses. The MSP of a crop is common throughout the country and 23 crops are currently being procured under it. 

The MSP is fixed on the basis of recommendations of the Commission for Agricultural Costs and Prices (CACP) under the Ministry of Agriculture, Government of India. Since 2009, the Commission fixes minimum support price of a crop based on cost, demand, supply position, change in prices, market prices, variable costs and prices of the international market. The Ministry of Agriculture also states that determining the cost of production under cultivation does not only include cash expenditure but also the cost of farm and family labour (as per the market rate), which means that the agricultural wage rate is also considered while fixing the MSP. 

Apart from paddy, maize may also be seen as an example. In the year 2016-17, the farmers of Karnataka had cultivated maize with a total expenditure of Rs 28,220 per hectare, whereas the farmers of Bihar spent Rs 32,262 for cultivation in the same area, Rs 24,716 was spent by Jharkhand farmers and Rs 51,408 by farmers of Maharashtra. The central government, however, offers a common MSP of Rs 1,760 on maize. 

The MSP is fixed on the basis of cost, demand, supply position, change in prices, market prices, variable costs and prices of the international market

According to the Commission for Agricultural Costs and Prices (CACP), 33 quintals of maize was produced in one hectare on an average during the year 2017-18 in the country. But the production varies state-wise. In Tamil Nadu, 65.5 quintals were produced in one hectare while 68.2 quintals were produced in the same area in Andhra Pradesh and Bihar produced 36.4 quintals per hectare. 

The Commission for Agricultural Costs and Prices averages the cost price of different regions for a crop and then the MSP of that crop is fixed. There are a number of reports on the Commission’s website according to which the total cost of a crop (labour, seed, fertilizer, machine, irrigation, pesticides, seeds, interest and other expenses) varies throughout the country.

Looking at the agricultural wage rate, the one-day agricultural wage rate in Andhra Pradesh is Rs 312 (as on January 2018) while the same rate in Assam is Rs 277, Bihar Rs 264, Rs 236 in Gujarat, Rs 367 in Haryana, Rs 439 in Himachal Pradesh, Rs 321 in Karnataka, Rs 691 in Kerala, Rs 298 in Madhya Pradesh, Rs 226 in Odisha, Rs 349 in Punjab, Rs 267 in Rajasthan, Rs 424 in Tamil Nadu, Rs 243 in Uttar Pradesh and Rs 275 in Punjab while the all-India average agricultural wage rate is only Rs 283. 

It is evident from the above figures that the rate varies widely from state to state. However, when the Commission for Agricultural Costs and Prices had fixed the MSP of Kharif crops in the year 2019-20, the average agricultural wage rate of only Rs 190.78 was added. Similarly, other expenses like irrigation, pesticides and seed are also different state-wise, then why is the MSP common for the entire country and whether this policy needs to be changed now? 

According to the Constitution, agriculture is a matter of state list. So, even the state governments can increase the rate of MSP, but why don’t they?

“The central government decides MSP on the basis of average expenditure,” said Sube Singh, assistant director, Commission for Agricultural Costs and prices. “It is also a matter of the states, so the state governments also have a right to increase the MSP according to their parameters.”

The Commission for Agricultural Costs and Prices averages the cost price of different regions for a crop and then the MSP of that crop is fixed

Kedar Sirohi, acting president of the Madhya Pradesh Kisan Congress, explained: “Even though the central government says that agriculture is a state matter, the fact is that the central government does the job of deciding everything from the trade organisation to the minimum support price and agricultural trade policies, what then is left with the state governments?”

“If the state government increases the MSP of a crop, which we call bonuses, the central government buys that crop only at its own fixed MSP. Further, the quota of states is also fixed and the government does not buy anything above that. The state governments have to incur huge losses. Therefore, it is now necessary to change the policies of MSP. Anyway, it does not benefit the farmers. This policy needs to be discussed afresh again,” he added.

The Commission for Agricultural Costs and Prices in its report has hailed the bonuses provided on the MSP by the State governments as a mere distortion. It is also mentioned so in the Kharif 2019-20 report. The report said: “Some state governments have been giving bonuses on minimum support price for paddy, particularly during the past few years, which creates distortions in the market, harming the private sector. During the years 2017-18 and 2018-19, states like Kerala, Tamil Nadu and Chhattisgarh had declared bonus for paddy. Chhattisgarh declared a bonus of Rs 750 per quintal for paddy in 2018-19, which is about 43 per cent of MSP. Similarly, Kerala paid a bonus of Rs 760 per quintal for paddy (Grade A) in 2018-19 and Rs 780 per quintal for paddy (regular).”

“The government’s procurement of rice in Chhattisgarh is much more than what is required under the NFSA (National Food Security Act) and other schemes, therefore, it will be difficult for the state to dispose of the additional reserves. Bonus upon the MSP affects the balance of the crops. The commission had reiterated its earlier recommendation to avoid giving bonuses especially in states with excessive paddy production,” according to the report.

The cost of paddy (regular) by merging A2 + FL is Rs 1,208 per quintal (Kharif marketing season 2019-20) while the government is providing it an MSP of Rs 1,812 which is reported to be 150% (1.5 times more) of the cost. Similarly, the price of Jowar, Ragi, maize, Tur, Moong, Urad, groundnut, sunflower, soybean, sesame, ramtil and cotton is also being paid by the government towards 150 per cent of the cost while the price of Bajra is given at 185 per cent.

The CACP breaks the cost of cultivation into three parts in order to assess the MSP — A2, A2+FL and C2. A2 includes all cash spendings by farmers for crop production such as seeds, manure, fuel and irrigation, etc, while the estimated wages of the farmer family are also added to the crop labour — crop production cost with cash expenditure in A2 + FL. The commercial model of cultivation has been adopted in C2 which also includes the total cash cost and the farmer’s family remuneration besides the rent of the farmland and the interest on total agricultural capital. 

Though the state governments can increase the rate of MSP, they don’t. That’s because the central government buys a crop only at its own fixed MSP

Presenting the budget on behalf of the Central government in February 2018, the then Finance Minister Arun Jaitley had assured that the farmers would be getting a minimum of one-and-a-half times of their costs for the crops. The CACP report amply proves that presently, the MSP is being fixed with the cost of the crop as A2 + FL.

In the year 2004, a committee headed by Professor MS Swaminathan was formed and named the National Commission for Farmers. It submitted its report to the government in October 2006. The report advocated for the farmers to be paid the price of the crop at C2 cost which is not yet happening. 

One can understand it better with the example of paddy. The total cost for one quintal paddy is Rs 1,208 as per A2 + FL whereas in terms of C2, it is Rs 1,619. MSP of paddy (regular), at present, is Rs 1,812. So, if the government is claiming to have given one-and-a-half times the cost, it would only be as per A2 + FL, whereas, if C2 is added to the cost, the claim of one and a half times price stands a lie.

Dinesh Pekara, a resident of Bagbehra in Mahasamund, Chattisgarh, had cultivated paddy in his five-acre field last year. “The crop could not be sold at the MSP till today,” he told Gaon Connection over the phone. “During each sale, the mandi officials come up with some shortcoming or the other. Now, we have to begin sowing the next crop so we can’t wait and have to sell to the open market at whichever rate we may get.”

In the Gaon Connection survey last year, the farmers had said that the biggest problem for them was not getting the fair price of the crop. According to a report by the Organization for Economic Cooperation Development and the Indian Council of Agricultural Research (OECD-ICAIR), the farmers had lost Rs 45 lakh crore between 2000 and 2017 due to improper pricing of their product.

In the year 2015, the Shanta Kumar Committee, which was formed to suggest restructuring of the Food Corporation of India (FCI), had in its report stated that the benefit of the MSP reaches only six per cent of the farmers, which means that 94 per cent of the farmers in the country remain deprived of the benefits of MSP. At the same time, there was a startling report of the NITI Aayog regarding MSP in the year 2016, according to which 81 per cent of the farmers did not know that the government gives MSP on many crops. 

Earlier, farmers were assured that they would be getting a minimum of one-and-a-half times of their costs for the crops

Devinder Sharma, an expert on agriculture affairs, said: “The central government retains the right of MSP because it is up to it to decide how much stock to keep, how much to be made available in the market. All these decisions have to be made by the Centre. But it is not that we cannot implement it as per states. Now, suppose the cost of wheat in Punjab comes to Rs 2,500, the FCI should pay Rs 2,500 to the farmers and if the same cost comes to Rs 1,500 in Bihar, the government should give Rs 1500, but it is not happening due to lack of public awareness and support. While the farmer isn’t aware of many things, the work of government is easily accomplished.”

“The central government does not want it to happen. When the government of Madhya Pradesh and Chhattisgarh announced the bonus, the Centre had said that it would not buy the produce. That means, you don’t want the state governments to be able to do it. The entire policy needs to be reworked but the government will not allow it because the economists believe that food items should be cheaper. This facilitates control over inflation rate and the industry is provided raw material at cheaper rates,” he added.

“Many times, I have demanded that the income of the farmers should be at least Rs 18,000 a month, some people said that if that happens, the inflation will shoot up. Now, the way to avoid this is that if the government is procuring wheat at Rs 1,900, it should buy it at the same rate and the difference in cost is to be directed the farmers Jan Dhan account so that it does not affect inflation,” said Sharma. 

The NITI Aayog is the largest policy-making institution for the central government in the country. It too has questioned the existing MSP policy of the crop. In December 2018, after the minimum support price hike, the NITI Aayog had remarked in a report that it was only a partial solution. The Aayog had said that there was a need to form an agriculture committee instead of the existing Commission for Agricultural Cost Price. Further, the Aayog recommended auctioning of the agricultural produce in mandis from minimum fixed price and that private traders doing business in the markets for MSP system should work in close association with the government together. However, nothing could be worked upon these suggestions.

Talking about the issue, Vikrant Singh, founder of Finance and Economics Think Council, Banaras Hindu University, Varanasi, said: “The MSP will benefit the farmers only when the state government implements it in its own way with the help of the central government. While you may be considering statewise, the cost of a crop varies in every area too. The central government should have a policy like the GST for MSP which should be implemented with the help of states but is controlled by the central government.”

Gaon Connection spoke over phone to DK Pandey, advisor in the Commission for Agricultural Costs and Prices regarding the issue. He said: “The MSP is a matter of the central government, but the cost depends upon the type of soil, the available irrigation system. Now, if something is sown in the loam soil, its cost will be different from being sown in the sandy soil. Due to the variation in irrigation and wages, the cost of the same crop varies from state to state.”

“It is a policy matter. There is no draft of regional MSP and so, for the entire country, there is one MSP. The state government can give a bonus on any crop by looking at the cost that is incurred — it is its own decision. But if the states begin giving more MSP, the trend of inter-state trading (selling crops in other states) will increase. Farmers from other states will also come and sell their crops which would affect demand and supply, so it is also risky,” DK Pandey added.