Protesting farmers have put forward 12 demands. Of these, at least two have large economic implications. The first is the legalisation and increase of the Minimum Support Price (MSP) at C2+50 per cent profit for 23 crops for which the government announces the MSP. The second is the assurance of minimum 200 days of employment under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) with a daily wage rate of Rs 700. Let us look at their economic implications, if at all the government is willing to consider these.
The comprehensive cost (C2) includes, besides paid out costs and imputed wage for family labour (A2+FL), imputed rent on owned land, and imputed interest on owned capital. If the government accepts this formula of Cost C2+50 per cent, then our calculations show that the MSP levels for 23 crops will go up, on an average, by 25 per cent over the 2023-24 MSPs. Within this basket of 23 commodities, MSP increase will vary across crops. While safflower MSP will go up by 40 per cent, sugarcane’s FRP will go up only by 3 per cent, wheat by 9 per cent, and mustard by 8 per cent, as their existing MSPs are already well above cost A2+FL plus 50 per cent margin. For other crops, MSP increases would be: Sesamum (37 per cent), sunflower (32 per cent), soybean (31 per cent), groundnut (26 per cent), paddy (31 per cent), jowar (33 per cent), maize (29 per cent), ragi (30 per cent), tur (28 per cent), moong (27 per cent), urad (35 per cent), gram (25 per cent), and lentil (14 per cent). Commercial crops’ MSP will also go up: Cotton (24 per cent), copra (31 per cent), and jute (21 per cent). These MSP hikes would change the relative prices of these crops and could prompt shifts in cropping patterns. Wheat and sugarcane are likely to lose area, while paddy surpluses may go up significantly. This may force higher MSP hikes in wheat and sugarcane than indicated by C2+50 per cent formula.
Price hikes in commodities like soybean and maize, which are basic feed material for poultry, fishery and dairy, will push the prices of livestock and fishery products, thus leading to high food inflation. Additionally, the magnetic pull of stable and legal MSPs of 23 crops may attract many producers of horticulture, which can create shortages of fruits and vegetables. This would lead to higher inflation in fruits and vegetables too. Thus, overall, it seems that food inflation may go up by 20
to 30 per cent.
Making MSPs legal will be more problematic for farmers. Take the case of rice whose MSP will go up by 31 per cent under the new MSP formula. All exports of rice, about 22 MT, would become unviable adding to domestic supplies. When MSP of paddy goes up by 31 per cent and sugarcane by only 3 per cent, paddy will start substituting even sugarcane and many other crops in kharif season, creating a glut in the domestic market. And when supplies may far exceed demand, traders will not touch the excess supplies for fear of being harassed and fined. How much can the government buy and then distribute in PDS, and at what cost? How much fiscal cost it can inflict on the government if deficiency payments are paid is hard to estimate as it will depend upon the difference between market price and MSP, and at what price these commodities are unloaded in the market.
In any case, it is worth reiterating that the value of the MSP segment (23 crops) constitutes less than 28 per cent of agricultural output. More than 72 per cent of agricultural produce faces market prices and is performing much better than rice, wheat and sugarcane, in which MSP/FRP is most effective today. The average annual growth rates during 2010-11 to 2021-22 have been 9.1 per cent for poultry meat, 6.3 per cent for eggs, while combined poultry (meat and eggs) has grown by 8.3 per cent per annum. Fisheries have grown at 7.7 per cent, milk at 5.5 per cent, and horticulture at 4.5 per cent. These are all non-MSP segments of agriculture. Even within the MSP crops, pulses grew at 6.6 per cent, and oilseeds at 3.8 per cent, where government intervention is very meagre. Slowest growth is in sugarcane (2.9 per cent), paddy (3.1 per cent), and wheat (2.4 per cent), where the government intervenes heavily. These trends clearly indicate that agriculture is moving where the demand is surging fast.
The other demand of farmers for 200 minimum days of employment under MNREGA at a wage rate of Rs 700 per day poses a significant fiscal cost to the government. Currently, the budgeted amount for MNREGA stands at Rs 86,000 crore (Revised estimates 20223-24), which is based on an average of 48.7 days of employment per household at a weighted average daily wage of Rs 236.6. If we consider a minimum daily wage of Rs 700, and for 200 days, the estimated budgeted amount would be more than Rs 10.4 lakh crore. This will be a huge fiscal burden for a central budget that hovers around Rs 47 lakh crore. If one adds to this the demand for pensions and loan waivers, it will simply blow out the budget. So, all these demands seem to be asking for the moon, which is not feasible for any government to agree to.
However, our sympathies are with the farmers who deserve a better deal for prices of their produce. The first policy change that is needed to give them a fair deal is to remove export controls, stocking limits on traders, and stop unloading rice and wheat below the economic cost of FCI. Second, the government must strengthen and free up futures markets, options, warehouse receipt systems, and encourage FPOs to be part of organised value chains on digital commerce. In brief, “get the markets right”. Government should intervene only when there is a sudden price crash. For that, an augmented stabilisation fund could be used as a last resort, and not the first instrument.
What this means is eliminating the urban consumer bias, that always wants lower and lower prices, often at the cost of farmers. This mindset in policy making must change. Hopefully, one can talk rationally about it after the elections.
Gulati is Distinguished Professor and Prasad, research associate at ICRIER. Views are personal
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