Just 5-6% of the value of agricultural output is sold at MSP, and this is mainly restricted to a few north Indian states
Given the furore created over the link between the APMC reforms and the possible discontinuation of the Centre’s Minimum Support Price (MSP) operations—the government has continuously asserted MSPs will continue—it is natural to feel MSPs are critical to the well-being of the farm sector. The truth, however, is that MSPs are largely irrelevant, they matter just to a small number of farmers in a small number of north Indian states like Haryana and Punjab.
Indeed, they have wrought havoc on the land as higher prices for wheat and rice, along with a government promise to procure, have resulted in farmers in states like Haryana and Punjab growing water-intensive crops that have drained the land. Nearly 80% of the land in Punjab is over-exploited and the number is around 50% in the case of Haryana. In fact, while most attribute the Punjab farmer’s prosperity to the MSP policy, it has more to do with free water and massive electricity subsidies; were either to be properly priced, farmers would not be able to afford to pump-out water from a rapidly depleting water-table to grow the water-guzzling crops they do today.
While the Shanta Kumar committee report had pointed out several years ago that just six per cent of India’s farmers benefitted from MSP operations—that is, their crops were purchased at the MSP—the value of output that is bought at MSP appears to be similar. The total value of all agriculture output was around Rs 40 lakh crore in FY20 while the total value of MSP operations was around Rs 2.5 lakh crore; call this MSP’s 6×6 matrix if you will!
Keep in mind (see graphic), while 46% of farm output is not crops—it comprises milk, fishing, forestry, etc—fruit and vegetables (F&V) production is greater than that of cereals, but F&V get no MSP support from the government; nor does milk production, the success of which is almost entirely due to the cooperative movement like Amul.
Indeed, as this newspaper pointed out a few days ago, the agitation against the three farm Bills brought in by the government is almost entirely driven by vested interests, particularly in states like Punjab and Haryana. With 3% mandi taxes, Punjab collected Rs 1,750 crore by way of mandi taxes in FY20 and a similar amount by way of a rural development cess that is also imposed on sales in mandis. Amazingly, for a state where most of the crop is bought by Food Corporation of India (FCI) at a price fixed by the central government, arhatiyas earned a commission of Rs 1,460 crore in FY20! If the government’s APMC reforms result in alternative markets getting created, and farmers are able to sell directly to buyers like processing units or big retail chains, a large part of sales will then take outside the mandis; the state’s mandi taxes, rural development cess and even the unconscionable arhatiya commissions will all get hit.
With nearly Rs 5,000 crore at stake every year, apart from an assured market for its farmers, not surprisingly, Punjab is at the forefront of the agitation. Farmers in a state like West Bengal hardly sell anything to government agencies, so if the Trinamool joined the opposition to the farm Bills, it is because this presented an opportunity to embarrass the Centre; indeed, the fact that the government did not allow even a division of votes in the Rajya Sabha suggests it was struggling to get the requisite numbers to have the Bills passed. Such is India’s politics, while the Congress party is against the Bills today, in its 2019 manifesto, it had promised to abolish the APMC to free up the farm sector.
And while former finance minister P Chidambaram, who is leading the Congress charge against the Bills, has said that the government should have stipulated that the private sector would pay farmers the MSP for all crops, he ignores the fact that even before the Bills were passed—and that includes all the decades the Congress was in power—most farm prices remain 15-20% below the MSP, and it can be even higher in certain states.
Two years ago, an Icrier analysis of prices in Madhya Pradesh, which had introduced a direct income support scheme called Bhavantar Bhugtan Yojana, had found that the average price of soybean was Rs 2,594 per quintal between October 16 and December 31, or around 15% lower than the MSP of Rs 3,050 per quintal. In the case of urad, the mandi price of Rs 2,601 per quintal between October 16 and December 22 was 52% lower than the MSP of Rs 5,400. The annexure to the report (bit.ly/3hWlSZd) has historical details on the difference between market prices and MSPs for several crops.
Chidambaram is right, of course, when he says the removal of APMC will help only if there are alternative mandis. Indeed, the reason why the attempts to reduce to reduce the monopoly power of big mandis like Azadpur in Delhi and Vashi in Mumbai—for F&V—some years ago made little difference is that farmers had no other place to sell their crops in. So if PM Narendra Modi’s Rs 1 lakh crore agriculture investment plan does not result in alternative mandis getting created, or is not able to help various Farmers Producers Organisations establish themselves, the Bills may not really help free up farmers.
It is understandable that the government doesn’t want to create more opposition to the Bills right now, but sooner rather than later, it must look at the huge costs of running the current MSP-system for the farmer aristocracy in states like Punjab and Haryana. More so since the alternatives are cheaper and more equitable; FCI’s inefficiency ensures grain procured by it is more costly than that bought by private traders and the open-ended system of procurement ensures it has Rs 1.5 lakh crore or so worth of extra foodgrain in its godowns. Even with the Food Security Act’s over-generous 90-95% subsidy to two-thirds of the population, moving to cash transfers would save another Rs 50,000-60,000 crore per year. Think of what this money would achieve if it was ploughed into government investment every year or was given to every farmer instead of being spent for just 6% of farmers. And, this is apart from the massive soil and water degradation in states like Punjab and Haryana that MSP causes.