The economics and politics of MSPs

SS Johl

Former Chairman, CACP

The Government of India has announced the minimum support prices of rabi crops on the recommendation of the Commission for Agricultural Costs and Prices (CACP). The commission has a system of determining the prices of agricultural commodities. Every season, twice a year, the commission submits its report to the Ministry of Agriculture well in time before the plantation/sowing of crops. The government, too, is supposed to announce the MSPs well before the planting/sowing time so that farmers may plan their cropping plans accordingly.

Often, however, the announcements get delayed in the administration channels. This year again, it has been announced when the paddy plantation is about to finish. The time for the other crops is also over. The government goes lax probably because it does not see much scope for farmers to adjust their cropping plans as per the MSPs assured. This delay negates one of the three important mandates of the CACP: adjustment of the cropping pattern to the changing consumption patterns in the country.

 The second mandate of the commission is to recommend MSPs that will keep the farmers in business. In case the market prices drop to the uneconomic level, the government would stand as a buyer of last resort so that market clearance takes place above those prices. For this purpose, the Food Corporation of India was created to procure the commodities of wheat and rice, the Cotton Corporation of India to procure cotton and NAFED was to be the nodal agency for coarse grains. De facto, focus remained on wheat and rice only. Cotton was purchased mainly to meet the requirements of the government ginning mills. NAFED never took its mandate seriously. For sugarcane, it remained as advisory recommendations only. The rest of the crops did not have any procurement programme to support the MSPs. These prices are, therefore, just by name and redundant in their very nature. Therefore, the announcement of MSPs for all other crops, except for wheat and rice, is a meaningless announcement, as usual. This negates the second mandate of the CACP to ensure prices of all agricultural commodities so as to not put the farmers out of business.

The third objective is to keep in mind the interest of the consumers. Through time, this mandate has been forgotten. The economics of the system is that 9,000 farms in the country are selected scientifically (randomly), of which data are collected through cost-accounting methods, wherein supervisors are appointed. Every supervisor records data of all inputs — material, physical and monetary, from every farmer of the cluster on a daily basis. These data are placed with the universities and, in turn, special cells in the universities make summary tables of the data and supply them to the Economic and Statistical Adviser (ESA) of the Ministry of Agriculture. The ESA works out the average cost of production for every crop and supplies it to the CACP.  The cost of production is taken of the major growing states for every crop and extreme cases are dropped. This takes about two years. Many farmers have been questioning the cost of production, but no better method has been suggested so far. 

The CACP also has to keep in mind many other variables to fulfill its three mandates. The commission meets state government representatives, ministries, corporations and industries concerned throughout the year and travels to major producing states of different crops for extensive discussions in situ. Then keeping in mind the stocks available, requirements of the Public Distribution System, international market trends and consumer price index, the commission, comprising experienced farm economists, nominated farmer representatives and presided over by  a farm economist, makes an informed judgment of the MSPs for every crop every season and submits it to the government. The commission also makes several non-price recommendations to complement the price recommendation in the interest of the farm economy, consumer concerns and overall impact of the recommendation. Here the economics in the determination of the MSPs ends and the role of the commission is over.

It is from here that the politics of MSPs begins and distortions in the CACP recommendations start, at times so much that the CACP appears to be an unnecessary and redundant attachment to the political system. I often wonder how far even the Swaminathan Commission was more competent than the CACP to render its advice on the levels of MSPs! My observation on their recommendation was "either that commission did not have an economist or if they had any, he did not know economics". There is no other organisation that can handle more competently the question of farm prices and related non-price issues. The government needs to give due place to this commission while deciding the MSPs. Unfortunately, that is exactly what the government does not do and of late the deviation and arbitrariness in the announcements have increased considerably.  

When I was the Chairman of the CACP from 1987 to 1991, once Bhajan Lal, then Agriculture Minster, increased the cotton MSP for the central region, wherein also falls Haryana, by Rs 5 per quintal above the commission's recommendations, which we corrected the next season with scathing remarks. Then, Rajiv Gandhi gave a Rs-10-per-quintal bonus on paddy prices on the eve of the General Election. This changed the structural balance of the prices which was got corrected the next season by increasing the wheat prices by Rs 10 per quintal. Those were the days when the recommendations of an expert economics body (CACP) had the upper hand and, though fully empowered to do so, the government rarely and only marginally changed its recommendations, and those got corrected the next season. 

However, times have changed and the government has started playing politics of MSPs, ignoring the economics of it. I am not questioning the level of increase in the MSPs of the kharif crops. The question is of the basis on which these increases are given on the eve of the impending parliamentary elections. If these increases are given on the recommendations of the CACP, this commission is suspect of having been influenced. Also, unfortunately, there is no word on the non-price recommendations. Are there no such recommendations or have those been ignored, as usual?