MSP plan will hit Indian agriculture PDF Print E-mail
Monday, 02 July 2018 03:55
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With $27bn of cotton-based and rice exports at risk immediately, this is a solution that creates its own crisis


Given the government is likely to spend around Rs 190,000 crore anyway this year to procure around 68 million tonnes of wheat and rice, the costs of the price deficiency plan (PDP) based on higher minimum support price (MSP) don’t look too high. Based on the likely MSPs for all crops—MSPs will be fixed at 1.5 times the A2+FL costs except in wheat, where it is already 2.1 times—the scheme’s cost will be Rs 174,000 crore in case the market prices fall 20% below the MSP at the time of harvest. If market prices fall 30% below the MSP, the cost will rise to Rs 260,000 crore.

The problem, however, is that the current procurement schemes and the PDP are not mutually exclusive. So, once the PDP is finally announced, chances are the government will continue to procure wheat and rice as before—but at higher MSPs—and make deficiency payments for the other crops, as well as for the wheat and rice that it is unable to procure. If it procures the other crops, instead of just making deficiency payments, the costs will shoot up further.


So, while the final costs of the PDP will become clear only after the contours of the plan are made public, the government has to keep in mind the deleterious impact it will have. There will, of course, be distortions in the cropping pattern because of the increase in the MSPs. Cotton MSPs, for instance, will rise by 28% while there will be no hike for either tur or urad since their MSPs are already 1.6-1.7 times the A2+FL costs. Jowar cultivation could also rise significantly since the MSP will rise 44%—the current MSP is just 9% greater than A2+FL costs—but, with little demand for this crop, a rise in output will just depress prices further and, in turn, increase the deficiency payments. Indeed, one problem with Madhya Pradesh’s Bhavantar, on which PDP is based, is that traders manipulated prices, and it got so costly that the state had to suspend the scheme.

Apart from distortions in crop production, what is even more worrying is the impact on exports. In the case of rice, for instance, MSPs will rise by 13.5%, taking the cost of finished rice to Rs 26,651 per tonne. Once transport costs are added, to take the rice to Kandla port for instance, this makes it more expensive than existing global prices. Indeed, if the rupee falls below 67 to the dollar, the average assumed for FY19 in the calculation, the equation gets even more adverse—India exported $7.8 billion of rice in FY18.

In the case of cotton, where MSPs will rise by a whopping 28% if this formula is used, a lot more is at stake. On average, prices of finished cotton will rise to Rs 156,364 per tonne as compared to the current global price of around Rs 125,553 per tonne, based on a Rs 67 per dollar exchange rate; right now, with finished cotton at `121,818 per tonne, India is still competitive. Nor is the problem restricted to just exports of raw cotton. Since two thirds of all fibre used in India—both for local and exports market—is cotton, this will affect exports of both textiles and ready-made garments. India exported $19.34 billion worth of cotton, cotton-based textiles and ready-made garments in FY18, and a large part of this would become uncompetitive

In which case, since the government needs to work on alleviating farm distress—it has not been able to really free markets which would have helped farmers get better prices—a more practical solution is to make Telangana-style cash payments to farmers based on the acreage of land they cultivate. While the cash will reduce stress, farmers will continue to grow crops based on their natural attractiveness instead of on the basis of artificial prices set by the government—wheat MSPs right now are 2.1 times the A2+FL costs while this is 1.38 for rice, 1.09 for jowar, and 1.64 for tur, etc.

While the Telangana government is paying farmers Rs 8,000 per acre as cash support in two equal installments—Rs 5,000 crore has already been disbursed since the scheme began in May—Icrier professor Ashok Gulati has proposed a Rs 10,000 per hectare cash subvention that will cost `1.97 lakh crore across the country. While the per acre amount looks quite small, a look at the cost structure of most farmers suggests it is not. The latest reports of the Commission for Agriculture Costs and Prices estimates farmer profit—the latest data is for 2014-15 sadly—at Rs 4,265 per hectare for paddy, Rs 6,585 for tur, Rs 3,954 for cotton and Rs 10,842 for wheat, etc; profits have been calculated over the higher C2 costs, not A2+FL. Given how the scheme benefits farmers without distorting farm practices, and how it can’t be manipulated by traders either, the government would do well to look at using it instead of the proposed price deficiency one.


Prabhu story

The government’s plan to raise MSPs for crops to 1.5 times the A2+FL costs is likely to cost around Rs 1,75,000 crore in a full year if market prices are lower than the MSP by 20%. The exceptionally high cost of this plan, it is likely, was the reason for the delay in the announcement of this season’s MSP as the government was trying to work on ways to finance it; the plan is now likely to be announced later this week.

A calculation by Ashok Gulati, Tirtha Chatterjee and Siraj Hussain at Icrier a few months ago put the cost at Rs 113,035 crore, assuming the market price of crops was lower than the MSP by 20%; the figure was Rs 56,518 crore if the fall was 10% and Rs 169,553 crore if the fall was 30%.


The Icrier analysis, however, was based only on the marketable surplus, an assumption that may not hold when the government is promising an MSP for crops and saying it will compensate farmers at this price if the crop is not procured. In which case, it makes sense for farmers to bring in all their produce to sell to the government and buy back what they need for consumption from the market later, when prices have fallen. Madhya Pradesh’s Bhavantar saw an increase in market arrivals as farmers realised they could get a better deal, though 100% arrivals may not happen for a few years.

The analysis does not take sugarcane into account since, though its MSP — fair and remunerative price (FRP), in jargon — is two times A2+FL costs, cane is mandatorily purchased by sugar mills. Horticulture crops are not included in the proposed MSP scheme either.

If market prices are 10% lower than MSP, the cost of the price deficiency plan will come down to `86,982 crore and it will rise to Rs 2,60,947 crore if the price deficiency rises to 30% — in all cases, it is assumed that farmers will bring all their produce to the market.

Rice and wheat, needless to say, account for more than half the payment — 34% in the case of paddy and 21% in the case of wheat. Cotton procurement will add to around 11% of the total costs.

It is because of such high costs, and the distortions this will cause in crop production, that Gulati recommends using the China model — now being used in Telangana — of a per acre cash support instead.

Paddy MSPs, for instance, will rise by 13% while wheat will rise by 5%, maize 15% and cotton by 28% under the 1.5 times the A2+FL scheme. In the Telangana model, where Rs 5,000 crore has already been disbursed to 47.5 lakh farmers, a sum of Rs 8,000 per acre is promised in two equal instalments in the year — the scheme was operationalised on May 10 this year.

According to Icrier’s calculations, if a Rs 10,000 per hectare cash transfer is given at an all-India level, this will cost the exchequer Rs 1.97-lakh-crore divided between the Centre and the states. Since the scheme does not discriminate between crops in the manner the MSP one does, it will not influence what farmers grow.






Banikinkar Pattanayak & Prabhudatta Mishra

The proposed hike in MSP for crops, based on 1.5 times the A2+FL costs, in the case of rice and cotton especially, is likely to hit India’s exports considerably.

In the case of paddy, where the MSPs will rise by 13.5% due to the new formula, this will take the cost of finished rice to around Rs 26,651 per tonne. Once transport costs of 5% are added to this to take it to Kandla port, it becomes marginally more expensive than the existing global prices. If the rupee falls to below 67 to the dollar, on average for FY19, the competitiveness gets further eroded. Last year, India exported $7.8 bn of rice.


Matters are even worse in the case of cotton, where on average, prices will rise by a whopping 28%, from Rs 40,200 per tonne for kapas to Rs 51,600 per tonne. Given the conversion ratio of around 33%, this means the prices of finished cotton will rise to Rs 156,364 per tonne as compared to the current global price of around Rs 125,553 per tonne, based on a Rs 67 per dollar exchange rate.

At this price, India’s cotton exports will be hit badly, though the fact that the rupee is depreciating will cushion the fall a bit, says DK Nair, former secretary general of Confederation of Indian Textile Industry.
Since two thirds of all fibre used in India — both for local and exports market — is cotton, Nair says this will have a knockdown effect on exports of both textiles and readymade garments as well. India exported $19.3 bn worth of cotton, cotton-based textiles and readymade garments in FY18.

Gautam Nair, MD, Matrix Clothing, one of India’s largest garment exporters expressed the same fears.

“Garment exporters are already reeling under high yarn and dye and chemical prices. If, on top of that, the price of basic raw material (cotton) is raised substantially in 2018-19, it will have very, very significant negative impact on our apparel exports.”

IJ Dhuria, director (raw materials) at Vardhman Textiles, India’s largest spinning mill says raising the cotton MSP will benefit farmers and may not hit cotton exports too much immediately since China has slapped an additional 25% import duty on American cotton and the rupee has also depreciated against the dollar. If the import duty is reduced and/or the rupee corrects, he says, India’s cotton exports will be hit.

“Also, high raw material prices will erode the competitiveness of our textile and garment exports vis-a-vis competitors. It may prompt some players to explore the possibility of imports”, he added.









Last Updated ( Monday, 02 July 2018 09:37 )

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