Deficiency payments for farmers are a powerful tool only if agriculture markets are not manipulated

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Updated: January 24, 2018 10:02:47 AM

With farmer incomes continuing to collapse despite a good crop, the government—in the states and at the Centre—is understandably keen to do something to fix this, more so since the central government is in the last year before elections.

Agriculture, subsidy in agriculture, agriculture loans, farmers in IndiaThough there is enough evidence India’s agriculture is export-competitive in most years, exports have, mostly, been stopped the moment there is a hike in domestic prices. (Reuters)

With farmer incomes continuing to collapse despite a good crop, the government—in the states and at the Centre—is understandably keen to do something to fix this, more so since the central government is in the last year before elections. Apart from creating more irrigation, the obvious solutions are to encourage contract farming, to allow FDI in food retail which will facilitate more direct purchases from farmers, allow export markets to prosper—while overall exports grew just 11.2% in April-November 2017, agriculture exports grew 14.8% and, within this, rice grew 37%—and to ensure enough incentives for food processing, and create a vibrant commodity futures market that lets farmers effectively hedge their future. All this, however, takes time and, historically, governments have been wary to really push such a strategy. Though there is enough evidence India’s agriculture is export-competitive in most years, exports have, mostly, been stopped the moment there is a hike in domestic prices. That is why politicians continue to favour solutions like greater public procurement of crops and a continuous hike in minimum support prices. That strategy, however, can only go so far since public procurement, either through FCI or other government agencies, is limited. Indeed, this newspaper has, for a long time, been in favour of cash payments to farmers and dramatically scaling down MSP-based procurement which distorts incentives and encourages farmers to produce only crops that will be bought by government agencies. Two state governments have two radically different approaches. Madhya Pradesh has announced a deficiency-payments policy.

Once MSPs are announced by the Centre, it has announced, it will enforce this for all farmers. So, the policy says, if farmers sell their produce at below the market price, the state will make good the difference. Telangana, on the other hand, plans to give farmers Rs 4,000 per acre twice a year, and this money is supposed to take care of their needs for subsidised fertiliser, pesticide, seeds, etc. While it is not clear how the state will find the funds, it is to be hoped that this will automatically result in the state charging farmers for electricity and water. With Business Standard reporting that the central government may go in for a Madhya Pradesh-style deficiency payment mechanism—the central government will bear 40% of the total payments for all MSP crops except wheat and rice—the question is which scheme is better, the Telengana one or the Madhya Pradesh one.

If the Centre is looking at either, this needs to be done after a detailed study; and if such a scheme is to be introduced, it cannot be in addition to the existing subsidies, most of them have to go. Agriculture economist Ashok Gulati, however, argues that deficiency payments are a bad idea in the absence of serious market reforms. Since most markets are cartelised and controlled by traders—that is why farmers rarely get the right price for their produce—Gulati argues, the knowledge that the government is going to make good any deficiency, will encourage traders to rig the market even more and depress prices unduly. In the US, where insurance-based deficiency payments are a big thing, the prices used are those from deep and well-traded commodity markets—in other words, there is simply no substitute for the right policy, which means getting various agriculture markets to function fully.

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