MSP-based deficiency payments could cost Rs 80,000 crore or more PDF Print E-mail
Thursday, 08 February 2018 04:03
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The budget’s promise of MSP-based deficiency payments, should the government not be able to procure all crops at the MSP, could cost around Rs 80,000 crore based on conservative estimates. It will also trap the farm sector in massive bureaucracy and corruption as farmers will need to be registered to get these sops and some babu will need to clear the payments.


The estimates are based on current MSPs, not on the hikes that will need to be made if the new MSPs – also a budget promise – are based on 1.5 times the A2+FL costs which are lower than the C2 costs the MS Swaminathan report had recommended – though the budget did not specify which cost will be used, chances are the lower A2+FL will be used. In the case of paddy, for instance, MSPs will need to be raised by around 11%, 18% in the case of cotton, 41% for jowar etc using even this lower cost as the base.


A simple exercise has been done, assuming that all production will be eligible for the deficiency payments – fruits and vegetables have not been included in the calculations.


In the case of wheat and rice, where a substantial procurement takes place, only that portion of the crop that is not procured has been used for the exercise. Of the 105-110 million tonnes of both kharif and rabi rice, only 60 million tonnes has been assumed in the calculations for deficiency payments. Similarly, of the 95-100 million tonnes of wheat, only 40 million – roughly that grown in states like UP and Rajasthan – is assumed to be eligible.

The main calculation assumes a 20% shortage in the market price over the current MSP – a 10% assumption halves the deficiency payment to Rs 40,000 crore. In Madhya Pradesh, where the scheme is being implemented by the state, the price deficiency is even higher thanks to likely manipulation by traders.


In the case of urad for example, the ruling price is 43% lower than the MSP; the ruling market price in Madhya Pradesh is even lower, but the scheme uses an average price for a few states. The fact that just 32% of urad production in the state is registered under the scheme suggests corruption is quite high – otherwise, given the benefits to be got, everyone should have registered.


Under normal MSP-based procurements, only a certain proportion of the crop is available for sale to the government procuring agencies. But, in this case, since a deficiency payment is being made, all farmers should line up and bring all their crop to get the payment – the amount for personal consumption can be bought back at the lower prices. The entire crop coming into the market will depress prices further and raise the deficiency payments. A higher MSP will also make several crops – like cotton – less export-competitive and this will also depress prices if the crops come into the domestic market.


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