A recent Mint story revealed a remarkable oddity about India’s agricultural yields. It showed that during the 2000s the farm yield data collected by the agriculture ministry from two different sources for the same crops varied significantly. The most outstanding case was that of cotton, where the yields differed by over 300%. The variance was less alarming in other cases such as paddy (20%) and soybean (16%). However, given that the acceptable level variance is just about 2%-3% between the two methods of yield calculation, double-digit differences are worth probing.

What complicates the matter further is that across the board, yields are higher according to the comprehensive scheme (CS) estimate as against the crop cutting experiment (CCE) estimates. This is a of crucial importance because while the CCE estimates are used to arrive at the yearly overall production figures, the CS estimates are used to calculate the minimum support prices (MSPs) for the farmers.

The MSPs are calculated by the Commission of Agricultural Costs and Prices (CACP) by using the yield data and calculating the cost of production that a farmer would have incurred. The MSPs are the prices at which the government promises to buy any farmer’s produce and as such it is intended to be safety mechanism for the Indian farmers. CACP recommends MSPs of 23 commodities, which comprise seven cereals (paddy, wheat, maize, sorghum, pearl millet, barley and ragi), five pulses (gram, tur, moong, urad, lentil), seven oilseeds (groundnut, rapeseed-mustard, soybean, seasmum, sunflower, safflower, nigerseed), and four commercial crops (copra, cotton, raw jute and sugarcane).

If we assume that the CCE is the better estimate—since it is based on a far bigger sample survey than CS—then one has to ask if the secular overestimation of yields under the CS method, year after year, in turn led to a significant underestimation of the cost of production faced by the farmers as well as the MSPs.

The calculation of MSPs by the CACP is just as technical a matter as its eventual announcement by the government is political. It has been a norm that both central and state governments to lure farming community’s vote by announcing bonuses—over and above the MSPs recommended by CACP—just before elections of any consequence. However, notwithstanding the technicalities and politics involved, someone is always unhappy with the level of MSPs announced.

For instance, in 2011 cotton farmers of Maharashtra’s Vidarbha region vigourously agitated over low MSPs. According to them, the then MSP of 3,300 per quintal of cotton did not come anywhere close to their cost of production of 5,700 per quintal. Later, an analysis by the former CACP chairman, Ashok Gulati, accepted that the Vidarbha farmers’ distress was genuine. It is another matter that Gulati did not blame low MSP calculation for the distress. According to him, Vidarbha farmers choice of growing Bt cotton, which is highly input-intensive, in an region which has just 3% of the area under irrigation, was a risky one. In the same year, cotton yields in Gujarat were double that of Maharashtra.

In fact, according to Down to Earth magazine, a recent study by Mahatma Phule Agriculture University in Maharashtra has found that between 1996 and 2013, the cost of production for crops such as sunflower, green gram, wheat and sorghum in Maharashtra was 35% to 55% higher than the respective MSPs.

So is there something inherently wrong in the manner in which CACP calculates MSPs? Do the MSPs cover the cost of production?

A June 2013 study by Ashok Vishandass and B. Lukka, both associated with CACP, throws interesting light upon this matter by analysing the pricing and costs in the Indian crop sector during the 2000s.

“As there exists a time lag of two to three years in dissemination of cost data and given the imperative of announcing pricing policy for ensuing year, the Commission projects cost of production (CoP) of various crops for two to three years hence. An ex-post facto analysis of the projected and actual costs for the decade of 2000s revealed that, sometimes, these deviations have been large."

More specifically, it states how actual costs were actually more than CACP’s projected costs.

“...deviation of projected costs from actual ones was largely negative, and this negative magnitude was more in t3 (FY 08 to FY 11) than in earlier periods (FY 01 to FY 08). This finding made CACP to delve deeper into the plausible reasons behind this. It appears that this large deviation in t3 has crept in mainly due to sudden spurt in farm wages."

Since the report though, CACP has started using a correction factor to address the imbalance. However, there is another reason because of which MSPs may be appear insufficient.

“While formulating price policy, the Commission considers weighted average CoP of different crops. If these costs were to be normally distributed, about 50 percent of production of a particular commodity would have CoP less than weighted average, while the other half would have costs higher than this weighted average."

But as it turns out, if one takes C2 measure of cost by CACP, which not only recover a farmer’s paid out costs but also get rewarded for use of their own resources such as land, family labour and capital, in 2010-11 a majority of Maize production (58%) was found to have been produced at costs higher than the C2.

In fact, in 2010-11, “MSP covered C2 cost of 96% of sugarcane production, 94% of barley, 93% of paddy, 92% of R & M and 88% of wheat production in contrast to 32% of lentil, 36% of sunflower and less than 50 percent of tur... And this explains, at least partly, farmers’ preference to adhere to paddy-wheat and Sugarcane cropping pattern vis-à-vis pulses or oilseeds wherever feasible."

It is clear that if India has to continue with the practice of supporting farmers via MSPs then the existing system of MSP calculation must be improved significantly. Doing so would have far reaching impacts on how influencing farmer choices. Early in 2013, the government had appointed an expert committee under the stewardship of Ramesh Chand, the director of National Centre for Agricultural Economics and Policy Research. The draft report has been submitted but the government’s decision is pending.

Policy Puddle runs each Thursday and comments on public policy developments.