Cost of carrying extra grain can fund farm insurance
While the government draws up its contingency plan for a possible drought, it needs to draw a distinction between doing what is right and what seems right. Hiking minimum support prices (MSP) for various kharif crops would seem to be pro-farmer, but it isn’t. Only a small fraction of farmers, and in just 5-6 states at that, sell their grain to government procurement agencies—the biggest beneficiaries are Punjab and Haryana which collect a 14.5% mandi tax on all the sales. Indeed, were the MSP of rice to be raised by more than the R50 per quintal recommended by the CACP, this will end up hurting farmers since India’s rice is just about competitive at current global prices—while overall agricultural exports rose from $13 billion in FY10 to $30.1 billion in FY15, rice exports rose from $2.4 billion to $7.8 billion. In any case, with rice guzzling so much water, the last thing India wants to do in drought is to promote more water consumption. According to former CACP chief Ashok Gulati, with India exporting more than 10 million tonnes of rice in FY15, it ended up exporting 30-50 billion cubic metres of water!
In the case of wheat, similarly, with global prices collapsing and MSPs rising, the export competitiveness has been hit badly and FY15 exports contracted by around half. While raising MSPs of other crops may appear pro-farmer, the fact is there is little procurement of non-cereals. In FY15, 87 lakh bales of cotton were procured by the Cotton Corporation of India, but this was more the exception. As compared to 282 lakh tonnes of rice and 269.8 lakh tonnes of wheat, a mere 3.1 lakh tonnes of maize was procured in FY15. In FY14, it was 318.5 lakh tonnes of rice and 280.2 lakh tonnes of wheat versus 12.2 lakh tonnes of maize, 1.4 lakh bales of jute, 3.8 lakh tonnes of oilseeds and 0.8 lakh tonnes of pulses. In a state like Bihar which is going for elections soon, for instance, raising MSPs is irrelevant since there is no procurement there.
Another problem with hiking MSPs is that, as cereal procurement rises, it cuts into the money available to spend on creating fresh irrigation facilities or for paying for crop insurance. FCI holds around 16 million tonnes of extra foodgrains based on the new buffer norms—these are based on all states implementing the Food Security Act while just 11 have signed up so far—and around 20 million based on the old norm. Based on FCI’s carrying cost, that’s an additional expenditure of R7,600 crore (R9,500 crore on the basis of the old norms). If, according to Gulati’s calculations, India was to insure around 70% of its farm area—100 of 140 million hectares—this would cost around Rs 15,000 crore a year. Assuming the Centre paid even two-thirds of this, with the rest being picked up by state governments and farmers, the money can be got by just sticking to the buffer norms and not raising MSPs unduly. While drawing up its drought plans, this is something the government should keep in mind.