How can Narendra Modi government solve farm dissent? Roping in private sector could be solution; here’s why

Published: March 26, 2018 5:33:16 AM

The Maharashtra government conceded to the demands of the farmers, with the key demand being that of a loan waiver—promised to farmers before the last state assembly elections.

narendra modi govt, farm dissent, private sector, maharashtra farmer movementThe protest of Maharashtra farmers, who marched in thousands, has been followed by a mass sit-in in Rajasthan. (Reuters)

The protest of Maharashtra farmers, who marched in thousands, has been followed by a mass sit-in in Rajasthan. There have also been reports of Uttar Pradesh farmers being mobilised to stand up for their demands. Clearly, there is disillusionment in the farm community with the current system. Depressed agricultural prices have strained farm incomes. Farmers are facing distress in large parts of the country, paradoxically, despite good harvests in the last two years. Some of the demands made by farmers, such as enhanced minimum support price, are in line with the promise already made by the government. The announcement by the government , to increase the MSP of crops to 1.5 times the cost of production, is yet to be backed by any sound implementation frame-work. The procurement drives for crops other than wheat and paddy have failed to bring about any significant change in the condition of the farmers.

The Maharashtra government conceded to the demands of the farmers, with the key demand being that of a loan waiver—promised to farmers before the last state assembly elections. Loan waivers have, at best, served as a palliative, and have definitely not provided any tangible relief; besides, they always set a bad precedent. In any case, such schemes are not sustainable as they drain state finances apart from worsening credit-discipline among farmers, impacting lending patterns of banks and crowding out private borrowers. Continued farm distress exposes the incapacity of the government schemes being undertaken in providing remunerative prices to farmers, despite the agricultural sector being a major focus of the existing government’s policy-making. What, then, can be the way forward for government schemes, one that will give remunerative prices to producers and provide at least some direction to the promise of doubling farmers’ income?

First, the price deficit financing scheme—the Bhavantar scheme of Madhya Pradesh (MP)—needs to be tweaked to plug the current loopholes so that it can be implemented on a wider scale. Under the Bhavantar scheme, the state government has promised to transfer the difference between the MSP and the average market price to the farmers’ bank accounts. On the face of it, the scheme if implemented properly, should be immensely popular with farmers as it would provide immediate cash compensation to farmers. It would also obviate the need for the government to itself procure, eliminate the high costs of procurement, handling, storage and disposal of the commodities. If implemented well, it should also not distort cropping patterns as has happened due to selective implementation of the MSP scheme—just for rice and wheat. However, the Bhavantar scheme cannot be replicated in other states in its existing avatar due to multiple loopholes.

These loopholes include: a) collusion between traders and farmers to show lower sale price, to inflate the differentials and make illegal gains, b) the possibility of recycling of stocks since there is inadequate control on procured stocks, and c) sale of stock below fair average quality as there is no grading and assaying, creating needless burden on the exchequer. Since the scheme is open-ended, the financial burden of the scheme would be huge and unsustainable. To address these issues, the scheme should be undertaken under a restricted model in which procurement season should be short, preferably not exceeding 45 days. The stocks should be delivered only in empanelled warehouses to avail of the price differential compensation. Procured stocks should remain in storage till the conclusion of the procurement season. Stocks should be subject to third party independent audit to confirm both quality as well as quantity. Additionally, the relevant mandi prices used to calculate the price differential should be the weighted average price of the previous fortnight in the principal mandis of the state.

Second, the farmer-income ‘safety net’ cannot solely rely on government agencies because of huge financial implications as well as logistical challenges. Thus, there is an urgent need to engage credible private sector agencies in the price support mechanism for agri-commodities.

One of the models to engage the private sector is to establish their role post the procurement at MSP by the government since government agencies have had limited experience in storing and handling commodities other than wheat and paddy. The private agencies could undertake testing and assaying of the procured stocks, warehousing and storage of the procured stock in licensed warehouses, with issue of warehouse receipts (WHRs), and take responsibility for disposal/offtake through an e-auction platform.
Another model for price assurance can be worked out, wherein the government will entrust credible and financially-sound private entities with procurement of produce from farmers in lieu of a set of policy-enablers and incentives. Each identified entity, with a wealth of experience in supply-chain, shall undertake price support operations for a set of agri-commodities (grains, pulses, oilseeds, spices, cotton, potatoes, onions, etc). The entity can be mandated to procure the assigned commodities from farmers/market through a transparent online platform. The procurement will take place irrespective of market prices; the entity will be obliged to buy the minimum fixed quantity of the commodity/commodities assigned in its basket during each procurement/ harvest season. The entity would report its stocks to the government and shall provide free access to auditing by the government. In case the government wants to intervene in the market due to sudden price rise of the commodity, it would have the first option to purchase, but the private entity will have to be compensated for purchase cost and carrying cost, with a reasonable margin.

For such a model to work, certain enablers and incentives will be required from the government, which may include the following: a) unified licences for the entity, b) exemption of the entity’s procurement account from corporate income tax for certain period of time, c) disposal of procured stocks to be up to discretion of the entity, d) unburdening the entity from stock-limits and export restrictions, e) fixing import duties in a manner such that the landed price is not less than domestic market price (except in times of chronic shortage), f) giving the entity the benefit of any investment in creation of supply-chain infrastructure (as per the current benefits under section 35AD of the IT act), and g) compensating the entity for undertaking price support operations as with a reasonable percentage of MSP (for meeting the infrastructure, administrative overheads, storage, assaying, other procurement incidentals and price-risk).

The government would pro-actively promote the launch of futures and options for all commodities under the price support scheme through the commodity exchanges and there would be no position limits imposed on such entities for hedging.
Such a model would help reduce price volatility and provide a more stable and sustainable income for the farming community. It will be a constructive step towards doubling farmer income by 2022. Besides, it will also help minimise cropping distortions due to irrational price signals so that cropping decisions are more closely aligned to the market. A major role by the private sector, through a well-designed and transparent incentives and duties framework will be the key component of a market-driven and sustainable system that does not put an onerous burden on the exchequer while providing price assurance to farmers.

Sanjay Kaul

MD & CEO, National Collateral
Management Services Ltd

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