From Plate to Plough: The reach and depth of MSP

SAS data, even with caveats, shows how MSP is a poor choice when it comes to supporting small and marginal farmers

Hence, we chose to use WPI to convert the nominal income to real income, as this deflator has been used widely.
At a time when the government aims to double farmers’ income in real terms, guaranteeing above 100 days work guarantees under the MGREGA and larger investment in the livestock sector would perhaps be the right approach.

By Ashok Gulati & Ranjana Roy

We wish readers of this column, and our farmer families, a safe and happy new year, with greater prosperity, more productive and competitive agriculture that is environmentally sustainable and more nutritious.

Here, we focus on one of the key demands of the protesting farmers’ unions, that minimum support prices (MSP) be made legal. We estimate the reach and depth of MSP from the unit level data reported by NSSO (77th round) in its Situation Assessment Survey (SAS) of agri-households (agri-HHs) for the agricultural year July 2018-June 2019. The sample size of SAS was of 58,035 households in visit I and the same HHs were surveyed in visit II, but the sample dropped to 56,894 HHs in visit II as some HHs of visit I could not be tracked. Based on this unit level data set, just 8.8% of agri-HHs sold any crop to government agencies at MSP, and the value of that agri-produce is just 8% of the total value of agriculture (crops plus livestock). This is the picture at the all-India level, and obviously it differs quite widely across states, ranging from less than 1% reach of MSP in most of the north-eastern states to as high as 50% reach in a state like Chhattisgarh.

Interestingly, the total operational holdings estimated for India, based on the SAS sample, was about 89 million; agri-HHs are estimated to be close to 93 million—much lower than the Agriculture Census 2015-16 operational-holdings estimate of 146 million. However, the total value of agri-produce estimated from the SAS sample data is only about Rs 10.1 trillion compared to the National Accounts’ Rs 37.3 trillion. This raises serious doubts about the coverage and true representativeness of this sample. Although the SAS states that its results should be read more in terms of percentages and not in absolute terms, its extrapolation of absolute numbers is so vastly different from other sources that one is compelled to think and use those numbers to see what alternative set of numbers come up with respect to the reach and depth of MSP.

If one uses the Census and National Accounts data in the denominator, which are more reliable, the percentage of farmers benefiting from MSP shrinks to just 5.6% and the value of agri-produce benefiting from MSP to a paltry 2.2%. Whether these are more authentic or the ones generated from the SAS unit level data are, the fact remains that MSP’s reach, both in terms of agri-HHs or value of agri-produce, is not more than 9%; in fact, it could be much lower if one uses the aggregate data from Census and National Accounts.

While Punjab and Haryana farmers have benefitted the most from MSP due to the Green Revolution’s legacy, lately, procurement has spread to many other states, most notably Chhattisgarh and Telangana for paddy, and Madhya Pradesh for wheat. Some scholars have lauded this as MSP reaching the small and marginal farmers, especially in Chhattisgarh where, as per SAS data, almost 50% of agri-HHs and 45% of agri-produce benefited from MSP. But when we use the Census and National Accounts data, this falls to 37% for agri-HH and just 13.7% for value of agri-produce. However, what the narrative of MSP reaching small and marginal farmers in states like Chhattisgarh misses is that most of these farmers also benefit from highly subsidised PDS. Nothing can be more irrational and economically inefficient than first buying paddy from small and marginal farmers at MSP, and then giving them the same rice, after incurring 40% higher cost on top of MSP on account of procurement, stocking and distribution.

It is much better to directly help small and marginal farmers with income policy or through a diversification package towards high-value agriculture. PM-KISAN, giving agri-HHs Rs 6,000 in their accounts, is much more efficient and supportive. It can be refined and scaled up, say, by linking it with adoption of farming practices that are environmentally benign (reducing methane emissions, abstaining from stubble burning, etc).

Even though MSPs are announced for 23 commodities, price support essentially operates in wheat and rice, and that too in a few states. This creates highly distorted incentive structures in favour of wheat and rice, and along with highly-subsidised/free power and urea, is leading to environmental disaster in certain pockets of north-west India.

MSP distorts the basic logic of the supply-demand mechanism, slows down the process of diversification, and is a very expensive and inefficient instrument, besides leading to massive leakages and corruption. This cannot augment incomes of small and marginal farmers, who represent almost 87% of total farming community. With an average holding size of just 0.9 ha, unless farmers move rapidly towards high-value agriculture, there is not much scope to achieve better incomes for small-holders in an efficient and sustainable way. The government must focus on development of efficient value chains, commodity-specific FPOs equipped to assay, grade, and package their produce, and incentivising the private sector to invest in logistics, storage, cold chain, processing, etc. Till the time these value chains are scaled up, government can help farmers through an income support policy on a per hectare basis, tilted towards small and marginal holders, via direct transfers to avoid distorting markets or cropping patterns.

Gulati is Infosys Chair professor for agriculture, and Roy is research fellow, Icrier

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