Introductory Note: In parts A, B & C detailed account of declining Agri GDP is given and causes analysed. One important cause is underpricing farm produce In part D, synopsis of a paper prepared by S Mahendra Dev (Charman of CACP) & N Chandrasekhara Rao is given wherein it is concluded that cost of production of paddy has been on the increase and not compensated adequately by MSP mechanism up to 2006-07 in comparison to compensation for wheat.
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The paper sums up by observing that farm business income in
real terms declined by 1.15% per annum for rice farmers and the farming community is not necessarily better off as a result of higher support prices, as these prices are meant to compensate for the rising Cost of Production.
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The paper concluded that in spite of similar growth rates for yields, the profitability for rice is much lower than that of wheat and the margin over cost declined over time for rice from 30% in 1999-2000 to 7.6% in 2005-06.
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| (If the defects in fixing MSPs as pointed out by the Standing Committee on Agriculture were taken into account-pl. see Annexure- a worse situation than is presented by this analysis could have come to light.) |
There is thus merit in the demand for equal compensation for paddy and also suggested higher public investments to supplement price policy measures.
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Synopsis: (Please see foot note for definitions)
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There have been debates that rice should be given an MSP as similar to wheat as the costs of both the crops are similar. This issue is examined by looking at the trends in ratio of rice costs to wheat costs.
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*The total cost of production (CoP) per unit of rice reveal that after 1994-95 there are several years in which the paddy CoP per unit exceeded that of wheat. This was particularly noticeable after 1999-2000.
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| *Ratio of gross value of output (GVO) to C2 cost for rice has been maintained around 1.25 till 1995 but declined to 1.17 in 1996-2000 and to 1.07 in 2001-07. |
*In contrast to rice, the ratio of GVO to C2 cost for wheat increased from 1.21 in 1981-85 to 1.33 in 1996-2000.
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| *The profitability of rice seems to have been going down, while wheat farmers improved their profitability during 1981 to 2007. |
*If we consider C2 costs, the rice farmers could get only 9% returns over their total CoP in the TE 2006-07, when the wheat farmers
got 26% net returns over costs.
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*Significantly, the wheat farmers reaped more than 50% margin over total costs in 2007-08 though their counterparts in rice cultivation could get 13%margin in 2006-07.
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1. Inter crop price ratio: |
The intercrop price parity between rice and wheat shows that the ratio of paddy to wheat increased from 0.89 in 1981-82 to around 1.0 in 1989-90. It ranged between 0.94 and 1.04 during 1989-90 to 1996-97. The ratio declined significantly in 1997-98 because of a sharp rise in MSP for wheat. The MSP of wheat increased by 25% compared to 12.7% rise for rice in that year. This increase in the form of bonus for wheat distorted the intercrop price parity. It was below 0.90 from 1997-98 to 2007-08. Only in the last two years had the ratio reached 0.90 and beyond.
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2.Trend Growth Rates of Price realised in Rice and Wheat (in % per year)
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| Period |
Rice |
Wheat |
| 1st-1981-82-1992-93 |
-0.64 |
-0.51 |
| 2nd-1994-95-2006-07 |
-0.35 |
1.71 |
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Growth rates of prices realised in real terms show that rice prices had a declining trend in both periods, while wheat prices showed a positive
growth rate and increased in the second period. In other words, prices realized by wheat farmers have been higher and increasing as compared to that of rice farmers.
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3.Returns to Farming-C2CoC |
| Period |
Rice |
Wheat |
| 1981-82/1992-93 |
1.25 |
1.24 |
| 1994-95-2006-07 |
1.13 |
1.23 |
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Ultimately, one has to look at the trends in profitability in order to examine the viability of farming. Trends in the ratio of gross value of output to C2 cost, which gives the level of margin over total costs, show that the ratio of GVO to C2 cost for rice has been maintained around 1.25 till 1995 but declined to 1.13 thereafter, and in 2001-07 it was as low as 1.07.
The profitability of rice seems to have been going down, while wheat farmers maintained their higher profitability during 1981 to 2007.
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If we consider C2 costs, the rice farmers could get only 9% returns over their total CoP in the TE 2006-07, when the wheat farmers got 26% net returns over costs.
Significantly, the wheat farmers reaped more than 50% margin over total costs in 2007- 08 though their counterparts in rice cultivation could get 13% margin in 2006-07.
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4.At constant Prices
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| *The higher profitability for wheat as compared to rice can also be seen in the growth rates of returns in constant prices. Rice recorded positive and high growth rates in net income (1981-82 to 1992-93). However, it showed a negative growth rate in the second period (1994-95 to 2006-07). |
| *On the other hand, the growth rates in profitability for wheat recorded positive growth rates of more than 2%. In spite of similar growth rates for yields, the profitability for wheat is much higher than that of rice |
| *The margin over cost declined over time for rice from 30% in 1999-2000 to 7.6% in 2005-06 |
| *As compared to rice, the margins of MSP over C2 cost have been much higher for wheat except in 2009-10. |
| 5.Profitability across States |
| *The returns over C2 costs show that the states like Assam, Bihar,
Karnataka, MP, Orissa, Tamil Nadu, UP, and West Bengal witnessed negative returns for rice in the latest triennium ending 2007. |
| *On the other hand, all states covered all costs for wheat except
for Jharkhand and West Bengal. |
*The profitability improved for rice in AP, HP, Haryana and Punjab during the study period, while it declined for other states. |
| *On the other hand, returns for wheat rose for all the states considered in the study. |
| 6.Decline in Public Investment |
*Public investments on irrigation, research, extension and other
related infrastructure went down from 3.4% of agricultural
gross domestic product in the early 1980s to 1.9% in 2001-03.
Technology development, dissemination and adoption received a major setback due to this.
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*As a result of this policy shift, growth rates in yields have
gone down and eventually the Cost of Production started rising.
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*These rising costs necessitated higher support prices to sustain the long-run margin of 20% over total costs’ |
| *The MSPs in real terms declined in the 1980s and still returns to farming did continue to be sufficient for the farming community. This is because the Cost of Production of both rice and wheat fell during that period as productivity improved at more than 2.5% per annum and outstripped growth in Cost of Cultivation. |
| *On the other hand, the Cost of Production rose at the rate of nearly 1.5% per annum in both the crops during the 1990s and beyond, making rising MSPs necessary to help the farmers maintain the same incomes. |
| *It is important to note here that these higher support prices
are meant to compensate the slowdown in yield growth and
the consequent increase in Cost of Production that is the result of dwindling public investments. |
| *In this situation, if the MSPs are not hiked sufficiently as in case of rice
in the late 1990s and early years of the new millennium, margins
would have gone down and distress would have spread. |
*The analysis in the paper shows that farm business income in
real terms declined by 1.15% per annum for rice farmers.
*To sum up, the farming community is not necessarily better off as a
result of higher support prices, as these prices are meant to
compensate for the rising Cost of Production in the absence of yield increasing public investments.
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| 7.Additional measures needed |
| *To set right the situation, public investments have to be accelerated to reduce the Cost of Production, and thereby, the need for higher support prices. Also, a system of variable tariffs has to be implemented to insulate domestic prices from the impact of higher volatility in international food market. |
| *Cost of production increased in 1990s and beyond and they went up to nearly 1.5% per annum for rice and wheat. The returns over paid-out costs for rice farmers also declined at 1.15% per annum in real terms leading to distress. This declining profitability seems to have discouraged them from increasing spending on yield augmenting technology as shown by the relatively declining growth rate of Cost of cultivation. |
| *Though the Cost of production is similar for these two crops since the mid-1990s, the wheat MSP has been 14% higher than that of paddy since then. Since 2000-01, rice farmers have also suffered from lower price realisation than the respective MSPs, lower (7%) returns over total costs compared to 27% in wheat and a higher growth in Cost of production compared to the wholesale price indices between 2002-03 and 2006-07. |
| *On the whole, the analysis presented in the paper shows that there is some merit in the argument that the MSP of rice should be closer or slightly below that of wheat. The recent hikes in support prices for rice are therefore justified against this background. |
| *The averages tend to mask regional variations and the impacts of price policy in a vast country like ours with divergent climatic conditions. The CoP is higher than the all-India average in some of the poorer states due to low productivity and prices realised do not cover all costs. But the price realisation does cover variable costs and leaves a reasonable margin over that in all the states. |
| 8.To sum up: |
| highe public investments are needed to supplement price policy measures. They can help in increasing yields, reduce the
exclusive reliance on prices for farm profitability and food security,
and also hasten poverty reduction, as the history of poverty reduction in the country shows that the proportion of the poor declined at faster rates when food prices are low. |
| *Decentralising the procurement operations by building necessary infrastructure in states like UP, Bihar, MP and Orissa is critical in achieving equity in this regard. Also, price support operations need to be extended to other crops like pulses and oilseeds to stimulate their production. |
| *The storage capacities at present for buffer stocks are sufficient to store less than 30 mt, while the actual needs often go beyond 50 mt. Therefore, measures to increase the storage capacities have to be initiated immediately and at the same time the quality of the stored grain needs to be given equal importance by upgrading the technology. |
| S Mahendra Dev, N Chandrasekhara Rao/EPW/June 26, 2010 vol xlv nos 26 &27 |
| http://epw.in/epw/uploads/articles/14920.pdf |
| Foot Note: |
| Definitions: C2 cost of cultivation (CoC) per hectare and C2 CoP per quintal and A2 CoC. |
| The A2 (paid out costs) include the value of hired labour (human, animal, machinery), value of seed (both farm produced and purchased), value of insecticides and pesticides, value of manure (owned and purchased), value of fertiliser, depreciation on implements and farm buildings, irrigation charges, land revenue, cesses and other taxes, interest on working capital and also miscellaneous expenses (artisans, etc) and rent for leased-in land. |
| The C2 costs include paid out costs plus imputed value of family labour, rental value of owned land and interest on value of owned fixed capital assets. |
CS= cost of cultivation scheme
CoP/Quintal=Cost of production per quintal
CoC/Hectare=cost of cultivation per hectare |
| ANNEXURE: Parliamentary Committee on Agriculture (PCA) raps govt. on low MSPs not even covering costs |
i) MSPs HAVE NOT TAKEN INTO ACCOUNT COST OF LIVING
The MSPs suggested by CACP and announced by the Government have not taken into account cost of living of the farmers in running their household-activities |
ii) SAMPLE STUDIES- at times FALSE
Even the samples study for assessing cost incurred for raising a crop, supposed to be done at fields, is carried out, at times falsely even by sitting in office |
iii) RISKS FACTORS NOT TAKEN INTO ACCOUNT
FIX MSP AT COST PLUS 50% TO COVER RISK FACTORS
The CACP also does not take into account the risk factors and their
consequences. Natural risk factors which include weather aberrations, rains,
floods, famine conditions, pest, temperature fluctuations, hail-storm etc. are not given due weightage in calculating the cost factors. |
| There are other risk factors which are man created viz., Government intervention and market forces including national and international both, which try to control the prices of agricultural produce to their advantage. In 1980s, the then Union Agriculture Minister had admitted in Parliament that the risk factor was not taken into account by Agriculture Price Commission while calculating MSP. |
The Committee recommends that the MSP should be announced well before the sowing season of the crops covered under this scheme and should include Cost C2 plus 50 per cent. The profit margin on the industrial products, as in case of medicines has generally never been below 100%, whereas agriculture produce are never sold at these profit margins.
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iv) RENT TO BE INCLUDED AT OPPORTUNITY COST
The Committee observes that while calculating the Cost of production, CACP takes into account the rent for leased land and not the cost incurred towards owned land. It is necessary that interest foregone on owned land should also be counted towards calculation of cost of production. |
v) INCOME PARITY WITH GOVT. EMPLOYEES NOT TAKEN INTO ACCOUNT
The cost of living of farmers, their income parity with the Government employees are not taken into account with the result that the farmers are not even treated as skilled labour and the living standard of small and marginal farmers is even below that of a Group”D” Government employee, in terms of his standard of living. |
vi) DIFFERENTIAL MSPs NEEDED
The Committee are of the considered view that if it is not desired to take into account the State wise expenditure of per hectare crop, then the cost of production of food grains incurred on Government and Agricultural University farms should be counted as per hectare cost of the farmers in that region. |
vii) INCLUDE MILLETS, HORTICULTURE CROPS ALSO
The Public Distribution System, should include, wherever appropriate, ragi, minor millets and other wide range of nutritious cereals such as Jawar, Bajra, Maize, etc. and tubers such as potatoes, onions, etc. |
| NONE OF THE THESE RECOMMENDATIONS ARE IMPLEMENTED SO FAR |
| KRSR/080710 |
