Recently, the Cabinet Committee on Economic Affairs approved an increase in the Minimum Support Prices (MSPs) for Kharif crops for the 2018-19 marketing season. Subsequently, the Commission for Agricultural Costs and Prices (CACP) released its price policy report for Kharif crops for the marketing season 2018-19.
The central government notifies MSPs based on the recommendations of the CACP. These recommendations are made separately for the Kharif marketing season (KMS) and the Rabi marketing season (RMS). Post harvesting, the government procures crops from farmers at the MSP notified for that season, in order to ensure remunerative prices to farmers for their produce.
In this blog post, we look at how MSPs are determined, changes brought in them over time, and their effectiveness for farmers across different states.
How are Minimum Support Prices determined?
The CACP considers various factors such as the cost of cultivation and production, productivity of crops, and market prices for the determination of MSPs. The National Commission on Farmers(Chair: Prof. M. S. Swaminathan) in 2006 had recommended that MSPs must be at least 50% more than the cost of production. In this year’s budget speech, the Finance Minister said that MSPs would be fixed at least at 50% more than the cost of production.
The CACP calculates cost of production at three levels: (i) A2, which includes cost of inputs such as seeds, fertilizer, labour; (ii) A2+FL, which includes the implied cost of family labour (FL); and (iii) C2, which includes the implied rent on land and interest on capital assets over and above A2+FL.
Table 1 shows the cost of production as calculated by the CACP and the approved MSPs for KMS 2018-19. For paddy (common), the MSP was increased from Rs 1,550/quintal in 2017-18 to Rs 1,750/quintal in 2018-19. This price would give a farmer a profit of 50.1% on the cost of production A2+FL. However, the profit calculated on the cost of production C2 would be 12.2%. It has been argued that the cost of production should be taken as C2 for calculating MSPs. In such a scenario, this would have increased the MSP to Rs 2,340/quintal, much above the current MSP of Rs 1,750/quintal.
Which are the major crops that are procured at MSPs?
Every year, MSPs are announced for 23 crops. However, public procurement is limited to a few crops such as paddy, wheat and, to a limited extent, pulses as shown in Figure 1.
The procurement is also limited to a few states. Three states which produce 49% of the national wheat output account for 93% of procurement. For paddy, six states with 40% production share have 77% share of the procurement. As a result, in these states, farmers focus on cultivating these crops over other crops such as pulses, oilseeds, and coarse grains.
Due to limitations on the procurement side (both crop-wise and state-wise), all farmers do not receive benefits of increase in MSPs. The CACP has noted in its 2018-19 price policy report that the inability of farmers to sell at MSPs is one of the key areas of concern. Farmers who are unable to sell their produce at MSPs have to sell it at market prices, which may be much lower than the MSPs.
How have MSPs for major crops changed over time?
Higher procurement of paddy and wheat, as compared to other crops at MSPs tilts the production cycle towards these crops. In order to balance this and encourage the production of pulses, there is a larger proportional increase in the MSPs of pulses over the years as seen in Figure 2. In addition to this, it is also used as a measure to encourage farmers to shift from water-intensive crops such as paddy and wheat to pulses, which relatively require less water for irrigation.
What is the effectiveness of MSPs across states?
The MSP fixed for each crop is uniform for the entire country. However, the production cost of crops vary across states. Figure 3 highlights the MSP of paddy and the variation in its cost of production across states in 2018-19.
For example, production cost for paddy at the A2+FL level is Rs 702/quintal in Punjab and Rs 2,102/quintal in Maharashtra. Due to this differentiation, while the MSP of Rs 1,750/quintal of paddy will result in a profit of 149% to a farmer in Punjab, it will result in a loss of 17% to a farmer in Maharashtra. Similarly, at the C2 level, the production cost for paddy is Rs 1,174/quintal in Punjab and Rs 2,481/quintal in Maharashtra. In this scenario, a farmer in Punjab may get 49% return, while his counterpart in Maharashtra may make a loss of 29%.
Figure 4 highlights the MSP of wheat and the variation in its cost of production across states in 2017-18. In the case of wheat, the cost of production in Maharashtra and West Bengal is much more than the cost in rest of the states. At the A2+FL level, the cost of production in West Bengal is Rs 1,777/quintal. This is significantly higher than in states like Haryana and Punjab, where the cost is Rs 736/quintal and Rs 642/quintal, respectively. In this case, while a wheat growing farmer suffers a loss of 2% in West Bengal, a farmer in Haryana makes a profit of 136%. The return in Punjab is even higher at 1.5 times or more the cost of production.
The Finance Bill, 2017 is being discussed in Lok Sabha today. Generally, the Finance Bill is passed as a Money Bill since it gives effect to tax changes proposed in the Union Budget. A Money Bill is defined in Article 110 of the Constitution as one which only contains provisions related to taxation, borrowings by the government, or expenditure from Consolidated Fund of India. A Money Bill only needs the approval of Lok Sabha, and is sent to Rajya Sabha for its recommendations. It is deemed to be passed by Rajya Sabha if it does not pass the Bill within 14 calendar days.
In addition to tax changes, the Finance Bill, 2017 proposes to amend several laws such the Securities Exchange Board of India Act, 1992 and the Payment and Settlements Act, 2007 to make structural changes such as creating a payments regulator and changing the composition of the Securities Appellate Tribunal. This week, some amendments to the Finance Bill were circulated. We discuss the provisions of the Bill, and the proposed amendments.
Certain Tribunals to be replaced
Amendments to the Finance Bill seek to replace certain Tribunals and transfer their functions to existing Tribunals. The rationale behind replacing these Tribunals is unclear. For example, the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) will replace the Airports Economic Regulatory Authority Appellate Tribunal. It is unclear if TDSAT, which primarily deals with issues related to telecom disputes, will have the expertise to adjudicate matters related to the pricing of airport services. Similarly, it is unclear if the National Company Law Appellate Tribunal, which will replace the Competition Appellate Tribunal, will have the expertise to deal with matters related to anti-competitive practices.
Terms of service of Tribunal members to be determined by central government
The amendments propose that the central government may make rules to provide for the terms of service including appointments, term of office, salaries and allowances, and removal for Chairpersons and other members of Tribunals, Appellate Tribunals and other authorities. The amendments also cap the age of retirement for Chairpersons and Vice-Chairpersons. Currently, these terms are specified in the laws establishing these Tribunals.
One may argue that allowing the government to determine the appointment, reappointment and removal of members could affect the independent functioning of the Tribunals. There could be conflict of interest if the government were to be a litigant before a Tribunal as well as determine the appointment of its members and presiding officers.
The Supreme Court in 2014, while examining a case related to the National Tax Tribunal, had held that Appellate Tribunals have similar powers and functions as that of High Courts, and hence matters related to their members’ appointment and reappointment must be free from executive involvement.[i] The list of Tribunals under this amendment includes several Tribunals before which the central government could be a party to disputes, such as those related to income tax, railways, administrative matters, and the armed forces Tribunal.
Note that a Bill to establish uniform conditions of service for the chairpersons and members of some Tribunals has been pending in Parliament since 2014.
Inclusion of technical members in the Securities Appellate Tribunal
The composition of the Securities Appellate Tribunal established under the SEBI Act is being changed by the Finance Bill. Currently, the Tribunal consists of a Presiding Officer and two other members appointed by the central government. This composition is to be changed to: a Presiding Officer, and a number of judicial and technical members, as notified by the central government.
Creation of a Payments Regulatory Board
Recently, the Ratan Watal Committee under the Finance Ministry had recommended creating a statutory Payments Regulatory Board to oversee the payments systems in light of increase in digital payments. The Finance Bill, 2017 seeks to give effect to this recommendation by creating a Payments Regulatory Board chaired by the RBI Governor and including members nominated by the central government. This Board will replace the existing Board for Regulation and Supervision of Payment and Settlement Systems.
Political funding
The Finance Bill, 2017 proposes to make changes related to how donations may be made to political parties, and maintaining the anonymity of donors.
Currently, for donations below Rs 20,000, details of donors do not have to be disclosed by political parties. Further, there are no restrictions on the amount of cash donations that may be received by political parties from a person. The Finance Bill has proposed to set this limit at Rs 2,000. The Bill also introduces a new mode of donating to political parties, i.e. through electoral bonds. These bonds will be issued by banks, which may be bought through cheque or electronic means. The only difference between cheque payment (above Rs 20,000) and electoral bonds may be that the identity of the donor will be anonymous in the case of electoral bonds.
Regarding donations by companies to political parties, the proposed amendments to the Finance Bill remove the: (i) existing limit of contributions that a company may make to political parties which currently is 7.5% of net profit of the last three financial years, (ii) requirement of a company to disclose the name of the parties to which a contribution has been made. In addition, the Bill also proposes that contributions to parties will have to be made only through a cheque, bank draft, electronic means, or any other instrument notified by the central government.
Aadhaar mandatory for PAN and Income Tax
Amendments to the Finance Bill, 2017 make it mandatory for every person to quote their Aadhaar number after July 1, 2017 when: (i) applying for a Permanent Account Number (PAN), or (ii) filing their Income Tax returns. Persons who do not have an Aadhaar will be required to quote their Aadhaar enrolment number indicating that an application to obtain Aadhaar has been filed.
Every person holding a PAN on July 1, 2017 will be required to provide the authorities with his Aadhaar number by a date and in a manner notified by the central government. Failure to provide this number would result in the PAN being invalidated.
The Finance Bill, 2017 is making structural changes to some laws. Parliamentary committees allow for a forum for detailed scrutiny, deliberations and public consultation on proposed laws. The opportunity to build rigour into the law-making process is lost if such legislative changes are not examined by committees
[i] Madras Bar Association vs. Union of India, Transfer Case No. 150 of 2006, Supreme Court of India, September 25, 2014 (para 89).
