Home >Industry >Agriculture >Govt panel seeks MSP revamp, safety net to mitigate risks to farmers

New Delhi: In what could restore the terms of trade in favour of agriculture, a government panel has recommended a new cost-linked minimum support price (MSP) and a safety net for farmers.

The recommended MSP, or the floor price for foodgrain, will be at a 10% premium to costs, that would be derived through a formula. The panel proposed that the safety net will kick in in the event of an unexpected slump in prices below the MSP.

If the Bharatiya Janata Party-led National Democratic Alliance (NDA) does accept the suggestions, it will dent the anti-farmer criticism levelled against it by the opposition for its bid to effect amendments that will dilute the existing land acquisition law. At the same time, it will impose a fiscal cost on the central exchequer as it will bump up the food subsidy burden.

The panel—chaired by Ramesh Chand, director of the National Institute for Agricultural Economics and Policy, Delhi, and represented by the ministry of agriculture, Commission for Agricultural Costs and Prices (CACP), state governments and farmer bodies—was set up in April 2013 by the Congress-led United Progressive Alliance (UPA) to review the methodological issues in fixing MSPs and examine the mandate of CACP.

The report was submitted to the government last week. A draft copy of the report has been reviewed by Mint.

The report is significant, given the farmers’ long-standing complaint that MSPs do not cover the costs of cultivation. It comes at a time of acute farm distress, following last year’s delayed and deficient rainfall and this year’s unseasonal rains which have destroyed standing crops in several parts of the country.

The panel also proposed broadening the mandate of CACP—which is now restricted to computing MSPs—to deliberate on farm incomes and prepare regular policy briefs, to be placed before the Union cabinet.

To be sure, the NDA government informed the Supreme Court on 20 February of its inability to set MSPs at cost-plus 50% returns, as recommended by an earlier panel chaired by M.S. Swaminathan. Higher MSPs can distort the market, the centre told the apex court, going back on its electoral promise.

The Chand panel has dwelled at length on the risks underlying farming, especially given the rapid transformation of the agrarian economy from being primarily of foodgrain to riskier cash crops susceptible to price fluctuations. “Price shocks have become frequent... The pressure to meet family expenditure to meet the necessities of modern life has been forcing farmers to embrace risky ventures by using borrowed funds. Risks unleashed by market forces and price crash in many cases are leading to agrarian distress and sad situations like farmers’ suicides," the report said.

It added that while “other sectors have strong professional bodies like Ficci, CII, Assocham… to lobby for policies in their favour", there is no such body for farmers. The panel recommended the role of CACP be expanded and it be renamed “Commission on Agricultural Costs, Prices and Policies". It proposed CACP should monitor crop prices regularly to ensure farmers are not forced to sell below MSP, and make “immediate recommendations to government to address the situation".

The panel has also recommended a safety net for farmers if market prices dip below the MSP. The so-called deficiency price payment will ensure farmers get the difference between MSP and the market price, to cover for price uncertainty.

The panel also suggested CACP should publish an annual review of prices and policies affecting agriculture, which will be placed in the Parliament’s budget session. Additionally, CACP should submit a quarterly report on the state of agriculture, food, prices and farmers, with a list of policy recommendations, to be placed before the cabinet, similar to the CACP report on price policy, for considering its implementation.

Noting that trade policy decisions on tariffs, exports and imports are often taken to protect the interests of consumers and industry, which adversely impact farmers, the panel suggested CACP be consulted prior to taking such decisions.

It suggested broadening the sample size for estimating costs better. For computing costs of production, it said wage rates for heads of families should be valued at skilled and not unskilled rates. Further, costs (C2) should be raised by 10% to cover for farming risks and farmer’s managerial remunerations.

The panel also proposed the rental value of own land be calculated at the prevailing rates, without any ceilings applied, and that the interest on fixed and working capital be estimated for the entire crop season and on actuals. The panel hopes this will correct the underestimation of interest costs as, often, farmers borrow from non-institutional sources at much higher rates. Additionally, the panel suggested post-harvest costs (like cleaning, drying, packaging, marketing and transport) incurred before actual sales be included in costs.

“There was a need to review the way MSPs are calculated, and the suggestion of including post-harvest costs, for instance, would benefit farmers," said Himanshu, associate professor at Jawaharlal Nehru University, Delhi, and a columnist with Mint. “The mandate of CACP needs a review for it has been reduced to a puppet in the last 10-15 years, playing to the wishes of government in power. But to suggest CACP to take up an additional policy role may not be sound. A separate body on the lines of a National Commission for Farmers is better suited to guide broader policies."

However, the Directorate of Economics and Statistics (DES) under the agriculture ministry, opposed nearly all major suggestions. It has opposed in its dissent note the idea of a safety net, 10% risk premium, placing annual policy reports in Parliament or cabinet, and including post-harvest costs while calculating costs of production.

“The Ramesh Chand panel report is a wake-up call for the government to finally fix the MSP system. It is pro-farmer and should get precedence over the Shanta Kumar panel report (on restructuring of Food Corporation of India—submitted in January)—which suggested dismantling the price support system altogether," said Ajay Vir Jakhar, chairman of Bharat Krishak Samaj, a farmers’ organization. “However, I doubt the government will implement the (Chand) panel’s recommendations as it was set up by the UPA, more so as it increases their (financial) burden."

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