Pricing of agriculture outputs or inputs is no different from the pricing of other products. In a market economy, they are decided by the free play of demand and supply. Many a times governments intervene to control prices, and they often mess up the system leading to huge inefficiencies. That does not mean that governments don’t have any role. Their major role should be to make sure that markets work well. And for that, they need to invest in information symmetry and physical infrastructure. They can also invest in facilitating the creation of efficient value chains through institutional innovations that minimise the price spread between farmers and consumers. They can help promote futures markets and options that try to minimise the risk, and help farmers take planting decisions based on what future prices are likely to be rather than basing them on the previous year’s prices. This is the forward-looking scenario that will align well with what India chose to be with the 1991 reforms.
If Manmohan Singh will be remembered for one great thing that he did for India, it would be freeing up the industrial policy from the controls and licence raj, freeing up the exchange rate, and gradually reducing import duties and opening up trade. This gave India a new direction. He did not touch agriculture as he thought it was a state subject. The only thing he did was to try to raise urea prices by 30% in one go as he felt that it was absurd to keep them frozen over long periods of time when costs were rising. It was resisted by many in the Congress party, who feared losing their vote base.
If agriculture is truly a state subject, as most of the activists cried when the National Democratic Alliance government brought in farm reforms, then why are they asking the Centre to make the minimum support prices (MSPs) legal? Let the states choose the option of making it legal and pay for the consequences. The Centre should leave agri-market reforms, including the MSP business, to the states.
It may be worth recalling that the system of MSP was introduced by the Centre with the setting up of the Agricultural Prices Commission in January 1965. It was meant to focus primarily on wheat and rice as India was hugely short of basic staples. India was importing 10 million tonnes (MT) of wheat in the mid-1960s under Public Law 480 from the USA against rupee payments. It did not have enough foreign exchange to buy food from global markets. Food aid from the US had its political undercurrents, a taste of which was experienced when food shipments to India were suspended for 72 hours by Lyndon Johnson as India issued a statement in favour of Vietnam when the US was at war with the Southeast Asian nation. In 1966, India also imported high-yielding varieties of wheat seeds from Mexico (18,000 tonnes), which ushered in green revolution. It was in that backdrop that the policy of MSP for wheat and paddy came into existence. India’s population was roughly 500 million in 1965.
Today, India is not facing the situation it did in the mid-1960s. Despite having 1.43 billion people, India is giving free wheat and rice (5 kg per person/month) to more than 800 million people. India is the largest exporter of rice in the world. The Food Corporation of India has mountains of rice that are almost three times the buffer stock norms. The MSP basket of goods has expanded over time, largely due to political pressure. MSPs were always supposed to be indicative prices, and the government would come to procure only if there was a serious crisis. The legacy of open-ended procurement of wheat and rice in some states, most notably in Punjab and Haryana, has continued till day. It has created an imbalance in the production basket. Too much rice is being produced primarily because of free power pricing and highly subsidised fertiliser prices. This is leading to the depletion of groundwater, soil degradation, and greenhouse gas emissions — an ecological disaster in the states of Punjab and Haryana.
The entire MSP framework needs a revisit — not in the direction of making it legal but freeing up prices of products as also its major inputs such as fertilisers and power. In fact, land markets also need to be opened up, starting with land lease markets. A highly regulated land market, and pricing of inputs and some outputs (rice and wheat), with massive procurement, is leading to huge inefficiencies in the system. Part of the problem stems from the public distribution system that gives free wheat/rice to almost 57% of the population with the government claiming that it has brought 248 million people out of poverty in the last 10 years. It has become a chicken-and-egg problem. Since India has locked itself in free grain distribution, it has to procure roughly 60 MT of grains each year to feed that system.
Given that India has digitalised much of the food system, both at the level of consumer as well as the farmer’s end, it will be much more frugal and efficient to move towards direct cash transfers to targeted beneficiaries who really deserve support. It implies a larger food subsidy to the extremely poor (antyodaya), and less to those who are above the poverty line. Similarly, aggregate input subsidy support to deserving farmers on a per hectare basis, and free up pricing of food as well as inputs like fertilisers and power. The efficiency gains and savings are going to be large, which can be ploughed back into agri-R&D and extension, education and skills, irrigation and water management, physical infrastructure of roads and markets in rural India, etc.
That is the nature of reforms that India needs for realising its dream of Viksit Bharat by 2047. The competitive populism to give free food, power, or highly subsidised fertilisers, or even pocket money in the name of ladli behna, etc. is a race to the bottom. It is not welfarism. It is simply bribe for votes.
The writer is distinguished professor, ICRIER.
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