Minimum Support Price (MSP) for Farmers – Ruminations for the Grassroots.

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Minimum Support Price (MSP) is an insurance given by the Government of India to insure farmers and agricultural workers against any sharp fall in farm prices. MSP is a policy instrument at the disposal of the government and is introduced based on the recommendations of the Commission for Agricultural Costs and Prices (CACP) generally at the beginning of sowing season. The major objective of MSP is protecting and supporting farmers during bumper production periods by pouring food grains for public distribution. There are two ways in which an effective MSP can be implemented, viz. procurement of commodities and as remunerative. The remunerative nature for farmers compensates the difference between MSP and the prices received by them.

With the agrarian crisis looming large, the policies need to emphasize on measures that can bring forth immediate results. These results could be achieved through the components of price and non-price factors. Non-price factors are long-term oriented and rely on market reforms, institutional reforms and innovations in technology in order to bring in an upward drift growth and income brackets of the farmers. Price factors are short-term oriented that necessitate immediate upward drift in remunerative prices for farm produce. It is within the ambit of price factors that MSP stands. The government notifies MSP for 23 commodities and FRP (fair and remunerative price) for sugarcane. These crops cover about 84% of total area under cultivation in all the seasons of a year. About 5% area is under fodder crops which is not amenable for MSP intervention. According to this arithmetic, close to 90% of the total cultivated area is applicable to MSP intervention, leaving a small segment of producers amenable to price benefits, if the MSP were to be fully implemented.

So, how exactly does the CACP determine the Minimum Support Price (MSP)? CACP takes the following factors under consideration while determining the MSP:

  1. Cost of cultivation per hectare and structure of costs across various regions in the country and the changes therein.
  2. Cost of production per quintal across various regions of the country and the changes therein.
  3. Prices of various inputs and the changes therein.
  4. Market prices of products and the changes therein.
  5. Prices of commodities sold by the farmers and of those purchased by them and the changes therein.
  6. supply-related information like area, yield and production, imports, exports and domestic availability and stocks with the Government/Public agencies or industry.
  7. Demand-related information, which includes the total and per capita consumption, trends and capacity of the processing industry.
  8. Prices in the international markets and the changes therein.
  9. Prices of the derivatives of the farm products such as sugar, jaggery, jute, edible and non-edible oils, cotton yarns and changes therein.
  10. Cost of processing of agricultural products and the changes therein.
  11. Cost of marketing and services, storage, transportation, processing, taxes/fees, and margins retained by market functionaries, and
  12. Macroeconomic variables such as general level of prices, consumer price indices and those reflecting monetary and fiscal factors.

As can be seen, this is an extensive set of parameters that the Commission relies on for calculating the Minimum Support Price (MSP). But, then the question is: where does the Commission get access to this data set? The data is generally gathered from agricultural scientists, farmer leaders, social workers, central ministries, Food Corporation of India (FCI), National Agricultural Cooperative Marketing Federation of India (NAFED), Cotton Corporation of India (CCI), Jute Corporation of India, traders’ organizations and research institutes. The Commission then calculates the MSP and sends it to the Central Government for approval, which then sends it to the states for their suggestions. Once the states given their nods, the Cabinet Committee on Economic Affairs subscribes to these figures that are then released on CACP portals.

During the first year of UPA-1 Government in the centre in 2004, a National Commission on Farmers (NCF) was formed with M S Swaminathan (Research Foundation) as its Chairman. One of the major objectives of the Commission was to make farm commodities cost-competitive and profitable. To achieve this task, a three-tiered structure for calculating the farming cost was devised, viz. A2, FL and C2. A2 is the actual paid out costs, while, A2+FL is the actual paid-out cost plus imputed value of family labour, where imputing is assigning a value to something by inference from the value of the products or processes to which it contributes. C2 is the comprehensive cost including imputed rent and interest on owned land and capital. It is evident that C2 > A2+FL > A2

The Commission for Agricultural Costs and Prices (CACP) while recommending prices takes into account all important factors including costs of production, changes in input prices, input/output parity, trends in market prices, inter crop price parity, demand and supply situation, parity between prices paid and prices received by the farmers etc. In fixing the support prices, CACP relies on the cost concept which covers all items of expenses of cultivation including that of the imputed value of the inputs owned by the farmers such as rental value of owned land and interest on fixed capital. some of the important cost concepts are C2 and C3:

C3: C2 + 10% of C2 to account for managerial remuneration to the farmer.

Swaminathan Commission Report categorically states that farmers should get an MSP, which is 50% higher than the comprehensive cost of production. this cost + 50% formula came from the Swaminathan Commission and it had categorically stated that the cost of production is the comprehensive cost of production, which is C2 and not A2+FL. C2 includes all actual expenses in cash and kind incurred in the production by the actual owner + rent paid for leased land + imputed value of family labour + interest on the value of owned capital assets (excluding land) + rental value of the owned land (net of land revenue). Costs of production are calculated both on a per quintal and per hectare basis. Since cost variation are large over states, CACP recommends that MSP should be considered on the basis of C2. However, increases in MSP have been so substantial in case of paddy and wheat that in most of the states, MSPs are way above not only the C2, but even C3 as well.

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This is where the political economy of MSP stares back at the hapless farmers. Though 23 crops are to be notified on MSP, not more than 3 are are actually ensured. The Indian farm sector is also plagued by low scale production restricted by small-sized holdings, which ensures that margin over cost within the prevailing system generates at best low income for the farmers. This is precisely the point of convergence of reasons why the farmers have been demanding effective implementation of MSP by keeping the MSP 50% higher than the costs incurred. Farmers and farmers’ organizations have demanded that the MSP be increased to cost of production + 50%, since for them, cost of production has meant C2 and not A2+FL. At present, the CACP adds A2 and FL to determine the MSP. The Government then adds 50% of the value obtained by adding A2 and FL only to fix the MSP, thus ignoring C2. What the farmers and farmers’ organizations have been demanding is an addition of 50% to C2 to fix the MSP, which is sadly missing the hole point of Governmental announcements. This difference between what the farmers want and what the government gives is a reason behind so much unrest as regards support prices to the farmers.

Ramesh Chand, who is currently serving in the NITI Aayog, is still a voice of reason over and above what the Government has been implementing by way of sops. Chand has also recommended that the interest on working capital should be given for the whole season against the existing half-season, and the actual rental value prevailing in the village should be considered without a ceiling on the rent. Moreover, post-harvest costs, cleaning, grading, drying, packaging, marketing and transportation should be included. C2 should be hiked by 10% to account for the risk premium and managerial charges.

According to Ramesh Chand of NITI Aayog, there is an urgent need to take into account the market clearance price in recommending the MSP. This would reflect both the demand and supply sides. When the MSP is fixed depending on the demand-side factors, then the need for government intervention to implement MSPs would be reduced only to the situation where the markets are not competitive or when the private trade turns exploitative. However, if there is a deficiency price payment mechanism or crops for which an MSP declared but the purchase doesn’t materialize, then the Government should compensate the farmers for the difference between the MSP and lower market price. such a mechanism has been implemented in Madhya Pradesh under the name of Bhavantar Bhugtan Yojana (BBY), where the Government, rather than accept its poor track record in procurement directly from the farmers has been compensating the farmers with direct cash transfers when the market prices fall below MSP. The scheme has had its downsides with long delays in payments and heavy transaction costs. There is also a glut in supply with the markets getting flooded with low-quality grains, which then depress the already low crop prices. Unless, his and MS Swaminathan’s recommendations are taken seriously, the solution to the agrarian crisis is hiding towards a capitalist catastrophe. And why does one say that?

In order to negotiate the price deficient mechanism towards resolution, the Government is left with another option in the form of procurement. But, here is a paradox. The Government clearly does not have the bandwidth to first create a system and then manage the procurement of crops for which the MSP has been announced, which now number 20. If there is a dead-end reached here, the likelihood of Government turning towards private markets cannot be ruled out. And once that turn is taken, thee markets would become vulnerable to whims and fancies of local politicians who would normally have influencing powers in their functioning, thus taking the system on their discretionary rides.

There obviously are certain questions that deem an answer and these fall within the ambit of policy making. For instance, is there a provision in the budget to increase the ambit of farmers who are covered by the MSP? Secondly, calculations of MSP involve private costs and benefits, and thus exhibit one side of the story. For an exhaustive understanding, social costs and benefits must also be incorporated. With a focus primarily on private costs and benefits, socially wasteful production and specialization is encouraged, like paddy production in north India with attendant consequences to which we have become grim witnesses. Would this double-bind ever be overcome is a policy matter, and at the moment what is being witnessed is a policy paralysis and lack of political will transforming only in embanking the vote bank. Thats a pity!

India’s Banking Crisis is Made Worse by the Poor Performance of its Debt Recovery Tribunals, and What to Say About the Bankruptcy Code?

Debt recovery tribunals were set up under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 with the aim of streamlining the mechanism to recover bad debts. This process was earlier handled by civil courts before being shifted to 38 debt recovery tribunals and five debt recovery appellate tribunals across the country. Since their conception, these tribunals have been dogged by concerns about their judicial independence because the Ministry of Finance, which controls public-sector banks, has had significant influence on them.

Almost as soon as its parent statute was passed by Parliament in 1993, the Delhi High Court Bar Association challenged the constitutionality of the debt recovery tribunal on the grounds that its parent statute lacked the judicial independence that is expected of judicial bodies. In 1995, the Delhi High Court struck down the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ruling that it was “unconstitutional as it erodes the independence of the judiciary and is irrational, discriminatory, unreasonable, arbitrary and is hit by Article 14 of the Constitution”. (Article 14 deals with equality before the law). Subsequently, the Gauhati and Karnataka High Courts also struck down the same legislation for being unconstitutional. On appeal, however, the Supreme Court in 2002 over-ruled all of the High Courts and upheld the constitutionality of the legislation.

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DRTs were created to help financial institutions recover dues speedily without being subjected to lengthy procedures of civil courts have fallen into the same trap precisely. In the words of Shaswat Sharma, partner, KPMG, India, “The functioning of DRTs needs to improve to ensure banks are able to recover their existing loans and offer fresh advances at cheaper rates…In the current scheme of things there is no mechanism in place to ensure that the tribunal disposes the case in a timely manner. There is a strong case to bring in more accountability for the DRT.” If dealing with the subject matter at hand with speed is the biggest challenge facing DRTs, any number of additional DRTs and Appellate Tribunals should address this problem convincingly as was outlined by the Finance Minister during his Budget Speech 16-17. The under performance is even keeping the RBI worried. In the words of Raghuram Rajan, Governor, RBI, “If bankers cannot get their money back, they are not going to give ou loans at cheap priceSo, making sure DRTs work better, making sure that you don’t have excess number of stays, excess number of appeals, is what needs to be focused on.”
Bankruptcy Code: Now with all the possible means exercised to constrain the rising debts, bad assets of financial institutions, the situation still seems far from under control, and its here that the proposed Bill on Bankruptcy with the vision to consolidate scattered laws relating to insolvency of companies makes a strong point. Recently, Finance Minister reiterated the commitment to introduce the Bill in the upcoming session of the Parliament. As with other mechanisms, the efficacy is still in hypothetical stage, but the Bill at least promises to accelerate the winding-up process of defaulting companies and opening up a quicker exit route for lenders. The draft of the code draws on may parallels to the US Bankruptcy Code, especially allowing companies to carry out businesses while simultaneously going through bankruptcy proceedings, while differing on management control, where, unlike in the US, the management control in India passes over to “insolvency resolution processes”. But, the question remains as to how would this Bill address the issue of NPAs? The impact felt is likely to be in,
a. The time frame of 180-day limit (an extension of a further 90 days in exceptional cases) would help lenders decide on the viability of the business, whereafter a liquidation process sets in.
b. Economic and financial viability of the debtor company is to be discussed in negotiations with the creditors facilitated by “insolvency experts” rather than courts lending the process more credibility.
c. Bill would have ample scope for early recognition of financial distress helping the process of easing out businesses under stress.
The success of the Bill would depend on how well it is implemented and whether setting up of an “insolvency regulator” would have the requisite powers to see its successful implementation. For the RBI, “an early clearance of the proposed insolvency and bankruptcy bill will play an important role in the face of mounting potential losses.”
Despite having a handful of measures to address the issues of NPAs and NPLs, few seem to be working positively, but are heavily relied upon and banked on for lack of a better alternative. What is really the need of the hour is to arm these mechanism to the teeth for results to flow out, and unless such is undertaken, the likelihood of policy paralysis would ensue.