Citing inflation and WTO subsidy limit, NITI, Commerce red-flagged MSP hike

On June 7, the Cabinet chaired by Prime Minister Narendra Modi approved the increase in MSP ranging from 6 per cent to 10 per cent. The government had said the increase was in line with the Union Budget 2018-19 announcement of fixing MSP at a level of at least 1.5 times the cost of production, aimed at reasonably fair remuneration for farmers.

In response to the Agriculture Ministry’s note, Niti Aayog, the Centre’s think tank, wrote that “this much” of an increase in MSP would make it difficult to keep inflation in check. “The increase suggested in MSP varies from 5.3 per cent in case of urad to more than 10 per cent in crops like cotton (long staple), sesamum and moong. If this much increase is given to MSP, it will be very difficult to keep food inflation in the stipulated range of 4-6 per cent, which is very important for macro-economic stability,” NITI Aayog wrote in a letter dated May 16.

“The cabinet note, in most cases, keeps prices at 1.5 times the projected cost for kharif season 2023-24. This also implies that the entire increase in MSP recommended by CACP (Commission for Agricultural Costs and Prices) is on account of increase in projected cost. Anchoring CACP to 150 per cent of cost also implies that increase in cost is 50 per cent higher than the increase in MSP. In other words, it implies that a 6 to 10 per cent increase in MSP is based on the same percent increase in cost of production,” it said.

According to Niti Aayog, actual data on some of the cost items shows that the real wages in agriculture are not rising and the increase in price of urea has been absorbed by the Government of India by increasing subsidies. “The increase in price of diesel is also expected to be small between 2022-23 and 2023-24. Therefore, there is a need for close examination of projected cost which has necessitated 6 to 10 per cent increase in MSP. It is pertinent to mention that the cost considered by CACP is not actual, it is projected,” it pointed out.

Niti Aayog also said that in case the increase in cost of production is found to be 6-10 per cent, the recommended increase in MSP is justified.

It also said that the Ministry and CACP should collaborate to verify the on-ground situation at the state level regarding the effects of both price and non-price recommendations. “This can help sensitise the states about the operations related to procurement and challenges of marketing,” added the department.

The Department of Expenditure supported the CACP recommendations, but said the price increase in crops should be accompanied by implementation of key non-price recommendations. “The non-price recommendations of CACP are supported ‘in-principle’. However, these proposals (special schemes) may be routed through the appraisal/approval mechanism of EFC/cabinet depending on the financial outlays,” said the department in its letter dated May 9, 2023. It also said these must be routed through the Expenditure Finance Committee.

“According to CACP, labour shortage and rising wages are key concerns in Indian agriculture, and farm mechanisation could be a key strategy to overcome labour shortages. The commission recommends that collective/group ownership of machinery through self-help groups, cooperative societies, custom hiring centres, etc should be encouraged to make high-cost farm machinery and implements affordable to all classes of farmers at the doorstep,” the expenditure department wrote. “Supply side bottlenecks such as storage, warehouse infrastructure and transportation need to be addressed in a mission mode.”

The Department of Commerce highlighted the need to adhere to the World Trade Organization’s clause that subsidies should not go beyond the prescribed limit. “As per WTO’s AoA (Agreement on Agriculture) related to public stock holding for food security purposes, Market Price Support (MPS) provided through procurement of crops by the government at administered price (MSP, in case of India) is required to be notified to the WTO. Further, it needs to be ensured that product specific support is within the de-minimis limit, that is, 10% of the value of the production of the respective crop. Similar de-minimis limit also applies to non-product specific price support across the agriculture sector,” wrote the department in its letter dated May 18.

The department also said the procurement under MSP should not be open-ended and predetermined targets should be specified simultaneously for procurement of crops for which MSP is announced.

While supporting the proposal, the Department of Food and Public Distribution said the additional financial burden as a result of increase in MSP of paddy for kharif marketing season (KMS) 2023-24 will be Rs 13,819.80 crore and total implication will be Rs 2,12,907.60 crore.

Similarly, the Investment and Price Support division of the Ministry of Agriculture and Farmers’ Welfare, in its letter dated April 26, 2023, stated that there will be financial implication of Rs 126.99 crore due to higher MSP of pulses and oilseeds.

Agriculture Ministry’s rationale

The Agriculture Ministry did respond to the concerns raised by various departments. In response to Niti Aayog, the Ministry stated in a Cabinet note that while recommending MSP, CACP considers the cost of production and overall demand-supply situations of various crops in domestic and world markets.

“Increase in MSP for KMS 2023-24 is in the range of 5.3% to 10.4% and is essential to ensure remunerative prices for farmers, encouraging them to invest more in production and to ensure food security in the country. Higher MSP for crops such as oilseeds, pulses and Shree Anna aims to promote crop diversification,” said the Ministry.

“All India weighted average cost of production is one of the important factors in the determination of MSP. While recommending its price policy, the CACP considers all costs in an inclusive manner. The Composite Input Price Index (CIPI) is based on the latest prices of major inputs like human labour, machine labour, fertilisers and manures, seeds, pesticides and irrigation. Increase in estimated cost of production over previous year varies from 6.13% and 10.52%,” the ministry said.

In response to the department of expenditure’s comments, the ministry said, “For promotion of agricultural mechanisation in the country, a centrally sponsored scheme, ‘Sub-mission on Agricultural Mechanisation’, is being implemented. It aims towards expanding the network for custom hiring services of agricultural machines and equipment to increase utilisation of farm powder and ensuring availability of farm equipment and machines for small farms. Rashtriya Krishi Vikas Yojna (RKVY) also has this component.”

On the question of WTO commitments, the ministry said, “It is important to mention that while calculating the aggregate support, ‘inflation’ since 1986 has not been factored in. This leads to an understated External Reference Price (ERP) making the aggregate support overstated.”

Behind July spike

July inflation data showed a spike, but the biggest contributor was the sharp jump in vegetable prices, followed by cereals, pulses, milk and spices.