Agri reforms: Should we do away with minimum support price?

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December 23, 2020 7:15 AM

The government is working to deepen the commodity derivatives market—a replica of the MSP system. Farmers, through the FPOs, should be nudged to the exchanges to hedge their risks and move towards a diversified crop base

At an ideological level, an interesting conundrum comes to the forefront.At an ideological level, an interesting conundrum comes to the forefront.

Minimum support price (MSP) has become a controversial issue in the ongoing farmers’ agitation, even though there is little basis for the misconception that the government is withdrawing this programme. The only reason for apprehension is that while the government has assured the farmers that the MSP will not be withdrawn, historically, attempts have been made to remove subsidies. The concept of MSP, though, must be revisited.

MSP is a misnomer because the government steps in to purchase rice and wheat regularly as part of the Public Distribution System. The PDS has been sidestepped partly under the DBT, which suggests that the ration shop may not be required in the long run. In that case, what happens to the foodgrains that are procured? The procurement programme of the FCI is an open-ended one, which accepts fair quality offered and does not halt purchases at any time. Therefore, there are excess stocks with the government, creating another set of problems: locking up of capital, exposing the foodgrains to the threat of rot, etc. As of September 1, stocks of rice and wheat stood at 70 million tonnes against a buffer stock norm of around 41 million tonnes. On June 1, stocks were 83 million tonnes against a norm of 21 million tonnes.

In the case of other products, there is limited procurement at MSP as the government lacks the structures to procure, store and dispose of pulses and oilseeds. As of December 12, around 155,000 tonnes of pulses and oilseeds were procured—a very small proportion of total production. For Kharif 2019, the total production was about 23-24 million tonnes. Further, procurement is also region-specific and less broad-based as in the case of wheat and rice. The MSP, hence, is more of a benchmark price announced by the government and may not be effective most of the time outside of the PDS products.

The question then is, should we have an MSP-based procurement system? The argument for having MSP is that it protects the interests of farmers and ensures that their incomes are regularised. As a considerable proportion of the labour force, between 50-60, is employed in farms, this requirement is essential. The MSP enables farmers to choose the crop to cultivate at the time of sowing, knowing well that at the time of harvest, in case there is a fall in prices, the government will be there to buy their produce. Just like how the government protects SMEs with certain incentives, farmers too can claim their share of support. However, for this to work effectively, the promise of MSP has to be backed with a procurement ecosystem.

Are there arguments against this scheme? First, the MSP has become the first option rather than the last resort for farmers. Second, this has led to farmers opting to grow rice and wheat in larger quantities as a corollary. Such a development is politically acceptable as governments have continuously highlighted record foodgrain production as an achievement. One can never recollect high soybean or mustard production being highlighted, unlike cereals, especially, rice and wheat. This has led to neglect for other crops, which have no surety of back-to-back procurement. Further, there is a tendency to grow an average quality where the price is assured, and not improve the quality.

Third, rice and wheat cultivation (along with sugarcane) has led to a reduction in water table level in Punjab, UP and Haryana. It has also put pressure on irrigation, as farmers tend to overdraw subsidised water and electricity. This has created skewness in other areas as state budgets have to bear the cost. Last, a continuous increase in MSP, driven by a formula, directly adds to inflation as the market system is not allowed to operate with prices being guided in a single direction.

At an ideological level, an interesting conundrum comes to the forefront. There is politics involved as successive governments work to placate farmer groups. Due to the existence of such pressure groups, the MSP programme has become a shibboleth that cannot be touched. On the other side, as households have no lobby groups, there is no representation at the policy level. When fuel subsidy was removed, and the middle class paid more for its LPG and kerosene, there was no objection. When the fixed income earners see their incomes being denuded by a continuous lowering of interest rates, there is no lobbying for their interests. In such a case are we making too much noise on this issue due to the political undertones?

The farmer agitation has been taken to absurd levels, with the imbroglio now reaching the courts. For decades, it has been argued that the APMC laws must be repealed as the arhatiyas are exploitative. They give farmers lower prices and add intermediation costs to escalate prices for the consumer. Now, as the government has opened the door for an alternative, APMC is being lauded as a pro-farmer system. It is also ironic that states which have never used the mandi tax collections to create viable infrastructure for farmers are now saying that selling outside mandis without the taxes will deprive them of funds to build agri infrastructure. The counter-arguments given by the farmer lobbies don’t sound convincing either.

There is a pressing requirement to have a serious debate on whether India should retain the MSP concept. The government has successfully launched the Kisan cash transfer scheme, which is the right way to help farmers without distorting prices through faulty incentives that not only skew the cropping patterns but also come in the way of commercialisation of agriculture. It has also created large behemoths for handling foodgrains without a system for disposal of stocks. Such policies have, at the end of the day, led to higher prices for consumers.

The government is working to deepen the commodity derivatives market—a replica of MSP system. Farmers, through the FPOs, should be nudged to the exchanges to hedge their risk and move over to a diversified crop base. The exchanges, like NCDEX, should be used for selling the produce with the government bearing the cost or premium. This will lower the inefficiencies in the value chain and reduce the distortions in the market. The mandi or any area outside, as per the new law, can be the point of sale with price hedging being done on the exchange.

There is merit in dismantling the MSP system, which has become more of a political announcement, and ideally should not play a role in the functioning of economics. This may be the right time to start the debate.

The author is Chief economist, CARE Ratings. Author of “Hits and Misses: The Indian Banking Story”. Views are personal

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