New Delhi / Chandigarh: A comprehensive farm package aiming at increasing the government’s stock of paddy and rationalizing fertilizer use in the country was announced by the government on Thursday and triggered a political storm after it emerged that the government had gone against recommendations suggesting a higher price for the paddy acquisition.
Finance minister P. Chidambaram, after a cabinet meeting, announced the government would temporarily set aside the minimum support price (MSP) of Rs1,000 per quintal (100 kg) of paddy (rice with its husk intact) recommended by the Commission for Agricultural Costs and Prices, or CACP, the body that advises the government on pricing of agricultural commodities, and fix Rs850 per quintal as an “ad hoc measure”. The ad hoc price of Rs850 is 14% higher than the previous year’s MSP of Rs645.
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The CACP’s recommendations will be sent to the Prime Minister’s Economic Advisory Council, or EAC, for a final view, Chidambaram said. “The principal reason why we referred (CACP’s recommendations to EAC) is widely divergent views among states,” he added.
CACP analyses a dozen different parameters while deciding on the MSP, including cost of production, trends in market prices, demand and supply, effect on cost of living, and international prices before arriving at its recommendations. The MSP will come into operation only in the month of October when the paddy crop is harvested, and the announcement is made earlier for the benefit of assuring farmers that this is the minimum price at which the government will purchase their crop. In the last 10 years, this is the first time that the government has announced an MSP lower than that recommended by the CACP.
PRICING PADDY (Graphic)
“The government is clearly shirking its responsibility in the matter,” said Yashwant Sinha, finance minister in the previous NDA government that ruled India between 1999 and 2004 and currently deputy leader of the opposition BJP in Rajya Sabha. “The government is free to invite the recommendations of an expert body and then arrive at a politico-economic decision. However, to pass one expert committee’s recommendations to another expert committee is entirely wrong. The government must decide, whether on political or economic grounds.”
The data put out by the government shows the larger paddy producing states demanded a higher MSP. Andhra Pradesh, which is run by a Congress government, and Punjab, run by BJP’s ally Shiromani Akali Dal (Badal), wanted an MSP above Rs1,000, while lesser producers such as Gujarat and Madhya Pradesh, two states run by BJP governments, wanted an MSP below Rs1,000.
T. Haque, former CACP chairman, who retired last month and was closely associated with the current proposal criticized the government. “The economic logic applied by CACP in recommending an MSP of Rs1,000 included cost of production, demand supply situation, inter-crop parity between paddy and wheat and international market prices of wheat and rice. The cost of production, including marketing and transportation costs of both wheat and paddy works out to Rs1,165 per quintal and an MSP in wheat of Rs1,000 has led to procurement of 22 million tonnes. The same would have been achieved in rice had the government not intervened.”
However, others differed. According to Himanshu, who only uses a single name, assistant professor at New Delhi’s Jawaharlal Nehru University and a Mint columnist, India produces more than adequate rice. The government’s move reflects its concern on the inflationary impact of CACP’s recommendation, he said.
“MSP is primarily for the government to procure, at Rs850 they can procure. Once you raise it (MSP), it is difficult to bring it back, especially in an election year,” Himanshu said.
A part of the farm package was devoted to two policy reforms in the fertilizer sector, in an attempt to optimize its use.
The cabinet gave its nod to the much awaited policies of nutrient-based pricing of fertilizers and uniform freight in order to encourage balanced use of fertilizers as well as incentivize distribution of various fertilizers to remote areas of the country. Both the policies will take effect retrospectively from 1 April.
In a separate decision, the Centre has also decided to release 140,000 tonnes of di-ammonium phosphate (DAP) fertilizer to Karnataka this month, 20,000 tonnes more than the state’s estimated requirement in light of the recent farmer unrest (reported by Mint on 11 June) in the state due to fertilizer shortage.
The decision comes in the backdrop of the Karnataka chief minister B.S. Yeddyurappa’s meeting with Prime Minister Manmohan Singh and fertilizer minister Ram Vilas Paswan in New Delhi late Wednesday night. In 2007-08, India produced 32.6 million tonnes, or mt, of fertilizers and imported 14.5mt.
The parliamentary standing committee on fertilizers (comprising members of Parliament from various parties) headed by Anant G. Geete of the Shiv Sena, also met in the capital on Thursday.
“The committee was in agreement that Karnataka was facing a crisis due to shortage of fertilizers. We believe that the Centre should consult the state governments in matters regarding the distribution of fertilizers,” said a member of the committee who did not wish to be identified.
While the move to nutrient-based pricing will “lead to significant reduction” in the prices of many fertilizers, it would, say experts, increase the government’s subsidy bill. This is because the government fixes the price at which fertilizers are sold; it also pays manufacturers the difference between this and their cost of manufacture plus a fair return which is higher.
Since, 70% of the cost of production of fertilizer is made up of feedstock derived from crude oil, the spurt in international oil prices has also pushed up the cost of fertilizers and thereby the subsidy burden.
Subsidy payments have jumped in the past four years from Rs15,779 crore in 2004-05 to an estimated Rs95,000 crore in 2008-09, or 1.9% of the gross domestic product. Last year, the subsidy stood at Rs40,338 crore, which includes Rs7,500 crore paid through the first-ever issue of fertilizer bonds.
A Group of Ministers instituted to look into fertilizer sector reforms estimated an increase of at least Rs1,200 crore in the subsidy burden for 2007-08 if the nutrient-based subsidy was implemented. The actual impact will depend on the rate at which the nutrients are subsidized.
(Mint’s Ruhi Tewari, Ashish Sharma and Sangeeta Singh and PTI also contributed to this story.)