The government has seemingly put itself in a bind by accepting the so-called Swaminathan formula of fixing minimum support prices (MSP) for crops at 1.5 times their estimated production costs. The issue here is not about “what” production costs are taken into consideration – whether A2, A2+FL or C2. The first one covers all paid-out costs directly incurred by the farmer – in cash and in kind – on seed, fertiliser, pesticide, hired labour, leased-in land, fuel, irrigation, etc. The second includes A2, plus an imputed value of unpaid family labour. C2 is a more comprehensive cost that factors in the rentals and interest forgone on owned land and fixed capital assets, on top of A2+FL.
The government has settled for the intermediate A2+FL cost formula to arrive at crop MSPs. However, the more relevant point today relates to “how” the production costs, even if only A2+FL, have been estimated. For the upcoming 2018-19 rabi planting season, the Commission for Agricultural Costs and Prices (CACP) in the Agriculture Ministry has computed the all-India average A2+FL production costs for six crops: wheat, barley, chana (chickpea), masur (lentil), rapeseed-mustard and safflower. The projected increase in costs for 2018-19 over last year’s rabi season (see table) ranges from 1.8% for barley to 7.2% for chana.
These, on the face of it, look implausible: the retail price of diesel in Delhi Thursday, at Rs 75.45 per litre, was Rs 18.56 or 32.6% higher than a year ago. The country’s leading fertiliser seller Iffco has, with effect from October 1, raised its rates charged to farmers to Rs 28,000 per tonne for di-ammonium phosphate (up 30.1% from Rs 21,520 a year ago). It has also done so in NPK complex fertilisers — to Rs 26,800 per tonne for 10:26:26 (up 27% from Rs 21,100), Rs 27,000 per tonne for 12:32:16 (up 30.4% from 20,700) and Rs 20,800 per tonne for 20:20:0:13 (up 26.1% from Rs 16,500). The same goes for pesticides, where prices of pretilachlor (a herbicide) and cartap hydrochloride (an insecticide) are now at Rs 480-500 per litre and Rs 390-400 per 5 kg, as against their respective year-ago levels of Rs 350-360 and Rs 280-290.
The CACP’s latest price policy report for the ensuing rabi season, on the other hand, has constructed a Composite Input Price Index (CIPI), based on the latest available price data for major farm inputs. As per its projections, the all-India weighted average CIPI for rabi crops in 2018-19 would work out 6.3% higher than for the previous year’s season. What is interesting is that within this overall increase, the input price indices are slated to go up by just 4.5% for fertilisers, 6.2% for manures, 4% for insecticides and 5.1% for irrigation charges, with the corresponding figures for human, bullock and machine labour at 7, 6.7 and 5.9% respectively. Equally revealing is that the price increase in diesel — used as fuel for tractors, combine harvesters and irrigation pumps — has been taken at only 10.5%.
One reason for the CACP cost projections being out of sync with the actual prices farmers are currently paying for inputs could be that its report was submitted in July 2018. At that point, diesel was retailing in Delhi at about Rs 68 per litre, whereas it has since crossed Rs 75. This holds true even for fertilisers and pesticides, whose raw materials/intermediates (ammonia, rock phosphate, sulphur, potash, etc) and technical material/active ingredients are largely imported and their prices linked to global crude oil and gas rates. Their hardening, alongside the rupee’s weakening, has gained momentum only over the last three months or so.
Either way, it is clear that the CACP’s cost increase projections for the new rabi season would turn out significantly lower than the actuals, even if only A2+FL is considered. Take diesel, where an average wheat farmer consumes at least 80 litres per acre. A Rs 17-18/litre increase, thus, translates into an additional cost of roughly Rs 1,400 per acre. That, on a yield of 20 quintals, works out to Rs 70 per quintal. If the higher prices of fertiliser and pesticides are added, the extra production cost on account of these three inputs alone will be over Rs 100 per quintal. That, by itself, would erode a significant chunk of the gains from the Rs 105 per quintal increase declared in the MSP for wheat.
Another way to look at the whole thing, however, is that the government may have boxed itself into a corner by accepting the 1.5-times-production cost formula, originally proposed by the M S Swaminathan-headed National Commission on Farmers in its October 2006 report. The CACP used to earlier take into account a host of factors apart from cost of cultivation — supply and demand situation for the concerned commodity; market price trends (domestic and global) and parity vis-à-vis other crops; and implications for consumers (inflation), environment (soil and water use) and terms of trade between agriculture and non-agriculture sectors — while recommending the MSP for any crop.
This changed with the Union Budget for 2018-19, which announced that MSPs would henceforth be fixed at one-and-a-half times of production costs for crops as a “pre-determined principle”. The CACP’s job, in other words, has been reduced simply to estimate production costs of crops for a particular season and recommend the corresponding MSPs by applying the 1.5-times formula. But that has, in turn, now created incentives to underestimate production costs themselves and for governments — both the present and the one to follow — to claim how farmers are being guaranteed a minimum 50% return as per the Swaminathan formula.