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The curious case of minimum support prices 

The topic has again gained attention in light of the ongoing farmers’ agitation against the recently enacted farm laws.

Published: 26th October 2020 05:56 AM  |   Last Updated: 26th October 2020 05:56 AM   |  A+A-

A farmer waits for his wheat produce procured at the New Grain Market amid ongoing COVID-19 lockdown in Chandigarh

A farmer waits for his wheat produce procured at the New Grain Market amid ongoing COVID-19 lockdown in Chandigarh. (File photo| PTI)

One of the key demands made by farmers and opposition parties in their agitations against the Narendra Modi government in recent years has been the implementation of the recommendation of the National Commission on Farmers (NCF), popularly known as M S Swaminathan Commission, on fixing minimum support prices (MSP) of agricultural crops. The topic has again gained attention in light of the ongoing farmers’ agitation against the recently enacted farm laws.

The opposition parties allege that the Modi government is yet to implement the BJP’s 2014 election promise of bringing in the NCF’s recommendation of fixing MSP at 50% more than the comprehensive cost or “C2 cost” of production. On the contrary, the government claims it has already implemented the recommendation by awarding an MSP 1.5 times the cost of production (CoP) of various crops. What is the truth?

The NCF submitted five voluminous reports running up to 1,808 pages between December 2004 and October 2006. In its 5th report, it recommended that MSP should be fixed “at least 50% more than the weighted average cost of production”. On this basis, the farmer organisations and critics of Modi’s agricultural policies have demanded that MSP be fixed at 50% more than the C2 cost. The production costs of agricultural crops in India are defined under three categories: A2, A2+Family Labour (FL), and C2. A2 includes all expenses, in cash and kind, incurred by farmers on agri-inputs like seeds, fertilisers, pesticides, hired labour, etc.; rent paid for leased land; interest on working capital; and depreciation on implements and farm buildings.

A2+FL includes A2 cost plus an imputed value of unpaid family labour. C2 cost includes the expenses incurred over and above A2+FL. Specifically, C2 incorporates A2 + FL + interest on the value of owned capital assets (excluding land) + rental value of owned land (net of land revenue). The fact is, in its report, the NCF did not clearly specify which definition of cost of production—A2 or A2+FL or C2—should be considered while fixing MSP.

Professor M S Swaminathan was quoted as saying that “When we recommended 50% over costs, we meant (emphasis added) complete costs called C2, which includes all assumed costs.” The critics of the Modi government’s agriculture price policies endorse this claim with some more evidence. First are some remarks made on C2 cost in the Annexure of the 5th report of NCF. Second is the bullet point “Calculation of Minimum Support Price (MSP)—Cost [C2] + at least 50%” included in the PowerPoint presentation given by Swaminathan for the then Union agriculture minister.

These overlook the sub-plot in the NCF saga, which did not get attention in the debate so far. As part of its 4th report, the NCF submitted a Draft National Policy on Farmers (DNPF) to the government. The NCF then revised and elaborated the DNPF based on recommendations provided through extensive consultations throughout the country with farmers, NGOs, bankers, media, scientists, and suggestions and representations received from individuals, institutions, and organisations in writing. The revised DNPF (RDNPF) was submitted by NCF separately, along with its 5th report.

Based on the RDNPF and after consultations with state governments and the central ministries concerned, the government approved a National Policy for Farmers, 2007 (NPF 2007), and placed the same before Parliament in October 2007. It is important to note that none of those above documents—DNPF or RDNPF or the 5th report or the NPF 2007—contained any recommendation linking MSP fixation to C2 cost. Above all, the government’s policy action on NCF’s recommendations by way of drafting NPF 2007 was based on RDNPF, which was ambiguous on the inclusion of C2 cost.

Interestingly, the ambiguity was not addressed at the time of extensive stakeholder consultations held on RDNPF within and outside government or when the NPF 2007 was placed before Parliament. Even if one assumes that the NCF “meant” C2 cost when it wrote its recommendations on MSP fixation, the reality is that the government did not incorporate the C2 cost aspect in the NPF 2007. It is widely believed that in the run-up to the 2014 Lok Sabha elections, Modi had promised to implement NCF recommendations on MSP if voted to power. Here also, the picture is ambiguous. Modi’s speeches in the election campaign provided conflicting signals on this issue.

For instance, in an election rally held at Hazaribagh, Jharkhand, on 15 April 2014, Modi was reported as saying: “We will change the minimum support price. There will be a new formula—the entire cost of production (emphasis added) and 50% profit.” Since the term entire cost of production refers to C2 cost, this gives the impression that the cost referred to in the statement was the C2 one. Ten days later, while addressing another election rally in Pathankot, Modi said, “If the NDA comes to power, it will ensure remunerative prices to the farmers by adding 50% profit into the peasants’ input cost.

We will fix the MSP of crops incorporating 50% profit to farmers’ cost of production, including seed, irrigation, manure, labour.” Here it seems Modi was referring either to A2 or A2+FL cost. We also don’t find the promise of including C2 cost in the BJP’s 2014 Lok Sabha election manifesto. Without specifying which CoP, the manifesto promises that, if voted to power, the BJP would “take steps to enhance the profitability in agriculture by ensuring a minimum of 50% profits over the cost of production”.

From these accounts, one cannot conclusively prove that the BJP or Modi had promised farmers 50% of C2 cost as profit on farm produce. What the party promised in its 2014 election manifesto was a fixation of MSP that is 50% higher than CoP. The same has been implemented since 2018 in response to farmer protests, but based on the A2+FL cost incurred by farmers. Therefore, the origin of the recommendation to fix MSP to be 50%  higher than the C2 CoP remains a mystery!

Sthanu R Nair
Associate Professor of Economics, Indian Institute of Management, Kozhikode
(Views are personal) (srn@iimk.ac.in)



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