This was first published in The Wire. Reproduced below with data tables.
The Prime Minister spoke of his “dream”
of doubling farmer’s income by 2022 in a farmers rally in early 2016. Since
then, the government has been on a publicity overdrive to show that it is working
towards this goal.
The goal was reiterated by the Prime Minister in his Aug 15 2018 speech. One is
naturally tempted to ask how incomes have changed in the recent past.
The
NITI Aayog has pointed out the difficulties in
estimating changes in the income of farmers in general. The problem becomes
tractable if one confines oneself to incomes from just two crops, paddy and
wheat whose importance for farmer’s income will be apparent shortly. This
analysis shows that real incomes from paddy and wheat farming have fluctuated
in a narrow band and in the case of paddy at levels lower than prevailing 5-6
years ago.
The
importance of paddy and wheat
Paddy occupies 23% of total cropped area
and is grown in most parts of India while wheat covers another 16%. So between
them paddy and wheat use nearly 40% of total cropped area (See Agricultural
Statistics). Paddy and wheat are also grown by the largest number of
agricultural households – 59% and 39% respectively – according to the NSSO
2013 survey.
Further, the government procures over 30%
of the total crop in both rice and wheat at the Minimum Support Price (MSP)
that it announces every year. Procurement on this scale at MSP should strongly
influence the prices in the APMC mandis.
Income from paddy and wheat is thus of
interest both because of the number and spread of agricultural households who
depend on it and also because of the government’s ability to influence it.
Avenues
for increasing income
Higher income can come from increased
earnings and increased productivity. Earnings are determined by how much the price
realized by the farmer exceeds the cost of cultivation. Productivity measures
the crop produced per hectare. Let us
consider the question of productivity first.
Productivity estimates for the current
decade (2010’s) are available in the latest Price Policy Reports of the Commission for Agricultural Costs and Prices
(CACP). The Compounded Annual Growth Rate (CAGR) of productivity in wheat is
negative at -0.63%. Wheat farmers need higher earnings just to hold on to the
same income levels.
The productivity of paddy is increasing,
but at a paltry CAGR of 0.9%. This amounts to a growth of 5.5% in 6 years, and,
as we shall see is not enough to compensate for falling earnings of paddy
farmers.
The hope of higher income therefore rests
on higher earnings. To estimate earnings on paddy or wheat we need to know the
average price realized by the farmer.
Average
prices realized by farmers
The ‘average price’ we are looking for is
the total realization by paddy (or wheat) farmers in the country divided by the
quantity produced. It turns out that this data is embedded in the NationalAccounts Statistics (NAS).
The NAS records the output value of each
major crop including paddy and wheat. Output value is calculated as the product
of price and quantity produced where the price is expected to capture as
accurately as possible the income that accrues to the producer.
The Central Statistical Organization (CSO)
determines output value at district level using production data and average wholesale
prices prevailing in APMC mandis
during the peak marketing season. District level output values are aggregated
to obtain state and national level values (National
Accounts Statistics Sources and Methods 2012).
The output value of paddy (wheat) in NAS is
then an estimate of the total realization of paddy (wheat) farmers. The
‘average price’ can be calculated using production figures from the Ministry of
Agriculture and Farmers Welfare (MOAFW).
The charts below show the average price of
paddy and wheat realized by farmers along with the MSP announced by the
government.
 |
| Source: NAS 2018, MOAFW, Author's calculation |
 |
| Sources: NAS 2018, MOAFW, Author's calculations |
The charts show what is expected, that the MSP announced by the government indeed largely determines the average price realized by wheat and paddy farmers. With the exception of 2011-12, the average prices of both wheat and paddy have remained higher but within 6% of MSP.
However, what really matters for farmers
are earnings rather than the average price or MSP itself. We first look at
earnings on sale at MSP as this provides a clearer picture of government policy
at work.
Nominal
and real earnings at MSP
Nominal earnings at MSP are obtained by deducting
the cost of cultivation (“A2+FL” costs in CACP terminology, available in their
‘Price policy reports’) from the MSP. Real earnings can be estimated by
adjusting nominal earnings for inflation.
Paddy is brought to the market almost
throughout the year except the monsoon quarter. So the average Consumer Price
Index (rural) prevailing over the other 3 quarters (for example for 2016-17,
the average of Q4 2016, Q1 2017, Q2 2017) is used as the deflator of nominal
earnings to get real earnings at 2012 prices.
Chart 3 shows the nominal and real earnings
of paddy farmers who sell their produce at MSP. It is useful to remember that
30% of the total paddy produced is sold at MSP. The results are surprising to
say the least.
 |
| Source: MOSPI, MOAFW, CACP, Author's calculation |
First, the government actually let nominal
earnings of paddy farmers fall each successive year till 2013-14 by keeping
increases in MSP less than the increase in cost of production. The margins over
cost built into the MSP were reduced from 38% in 2011-12 to 27% in 2013-14. Fall
in nominal earnings lead to a steeper fall in real earnings because of
inflation. This was a deliberate policy of the government to lower earnings of
farmers selling at the government procurement price.
In subsequent years, the government of the
day fixed MSP’s to increase nominal earnings every year but the increase was
just enough to compensate for inflation. Margins over cost built into the MSP
remained at 28-29%. Real earnings of farmers selling paddy at MSP barely
changed from 2013-14 levels.
Why did the government act as it did?
It had two major concerns in this period –
burgeoning stocks of cereals and inflation. The stocks of rice with the
government rose from 19.6 million tons in July 2009 to 31.5 million tons in
July 2013, far in excess of the stock norms. Higher stocks meant higher costs and
a higher subsidy bill for the government.
MSP’s were held down for some years till
stocks of procured rice came down to more manageable levels - 21.7 million tons
by 2015. Subsequent pricing policy aimed at avoiding inflationary pressures
from any rise in cereal prices by keeping real earnings on paddy more or less constant.
Let us turn to wheat.
Chart 4 shows the nominal and real earnings
in wheat when sold at MSP. As wheat is
harvested in April-May, the average CPI (rural) prevailing in Q2 (for 2016-17
the average of Q2 2017) is appropriate as the deflator to get real earnings at
2012 prices.
 |
| Source: MOSPI, MOAFW, CACP, Author's calculation |
The government set MSP’s for wheat at
levels which led to real earnings of farmers falling till 2015-16. The margins
over cost built into the MSP fell from 110% in 2011-12 to 94% in 2015-16.
Just as in the case of paddy, the motivation
for such pricing was the rise in the level of wheat stocks with the government.
Wheat stocks went up from 32.9 million tons in July 2009 to 49.8 million tons
in July 2012. The government engineered successive reductions in real earnings
by fixing low MSP’s until stocks reached a manageable level of 30.2 million
tons in July 2016.
Real
earnings at average prices
We can now return to a consideration of
real earnings at average prices which are indicative of the incomes of farmers
as a whole from paddy and wheat.
The procedure followed is the same as for
computing real earnings at MSP. Charts 5 and 6 show earnings up to 2016-17 using
NAS 2018 data and the author’s projections for 2017-18 earnings based on the
prevailing MSP.
 |
| Sources: NAS 2018, MOSPI, CACP, MOAFW, AUthor's calculation |
 |
| Sources: NAS 2018, MOSPI, CACP, MOAFW, Author's calculation |
After a steep drop till 2013-14, real
earnings in paddy have moved up and down in a narrow band. In the case of wheat
too, they have moved up and down in a small range.
To sum up, an analysis of earnings on paddy
and wheat sold at MSP over the last 6 years reveals the government’s main
concerns while deciding increments in MSP.
In the initial period, the concern was to
reduce stocks of grain with the government which had reached over 80 million
tons in 2012. The strategy employed was to fix MSP’s at levels which would help
bring down procurement and facilitate the sale of excess stocks in the market.
After stocks came down to manageable levels
– around 55 million tons – in 2016, the main concern was to avoid stoking
inflation. MSP’s were fixed at levels that would ensure that nominal earnings
kept pace with inflation and real earnings remained at the same levels.
The governments hand in fixing MSP’s shows
up in how real earnings at average prices have moved over these years.
References to this article:
Mumbai Mirror piece - Oct 3, 2018
