It is about the subsidy, stupid!

January 6, 2021 6:15 AM

For a country at India's stage of development, subsidy must increase if our agriculture has to become globally competitive

The vocal demand for an MSP guaranteed by law.

By JS Deepak

The standoff between the farmers and the government is continuing during a harsh winter. After many rounds of negotiations, farmers insist that the new farm laws must be withdrawn. The government finds this difficult to concede. Deadlock in the negotiations is worrisome.

Is the stalemate because of grandstanding? Is the real problem being addressed? To my mind, the basic issue, and the elephant in the negotiating room, is the subsidy on account of minimum price support for rice and wheat, which farmers fear will wither away and expose them to market risk. Let me explain.

Farmers know that market price and increase in productivity alone are not sufficient to give them an adequate return. This is why the US gives subsidies to the tune of $62,000 annually per farm establishment. Second, the terms of trade are always against the farmer. He sells everything wholesale, buys everything retail and pays the freight both ways!

Third, governments, while talking of free markets, lean in favour of consumers who can articulate their anger with decibels. Increase in consumer prices, therefore, attracts immediate export and other restrictions that reduce the price realisation for farmers. Fourth, agriculture has certain special characteristics which weaken the negotiating position of farmers. That is the nature of the beast! The harvest comes in during a short period, so the forces of supply and demand work to depress prices. This asymmetry gets magnified if the farmer transacts with buyers who are large and impersonal! In this scenario, she falls back on the minimum support price at which the government buys her produce. The MSP is higher than the market price, and the differential is the subsidy to farmers.

Economists argue that investments in transport and storage of agriculture produce will reduce spoilage. True. But, if these facilities are controlled by major buyers, as will be facilitated by the new farm laws, the negotiating advantage will further move towards the buyers, often large private, multinational firms which will set prices. With their capacity to purchase, store, process and market, the benefits of efficiency in the value chain will be largely appropriated by corporates. Therefore, in the absence of an MSP, farmers could face impoverishment. Hence, the vocal demand for an MSP guaranteed by law.

The Government of India says that it does not propose to do away with the minimum support price system. It has also incorporated in the three laws several reform elements that experts have been demanding for decades. It is also willing to re-consider any offending elements in the laws.

Then, wherein lies the problem?
While many issues are muddying the waters, it appears mostly to be a case of lack of trust. Farmers suspect that the government, to ease its financial burden, maybe preparing to wriggle out of procuring wheat and rice at the declared MSP in future and leave them at the mercy of markets, as it does for other crops. Second, in March 2020, India has breached its subsidy entitlement for rice of 10% of the value of production permissible as per WTO rules. While our MSP scheme for rice and wheat is completely protected by the perpetual peace clause that India astutely negotiated in November 2014, this is seen as a red flag by some for dismantling the MSP system. Third, the pressure on government revenues on account of the Covid-19 pandemic may make this option appear attractive.

In this complicated scenario, what could be the possible solution?
Clearly, tire thy opponent, as a strategy, cannot be one. Having a law requiring all purchases at MSP, on the other hand, would make private sector procurement unviable and defeat the very purpose of the new laws.
Managing large food stocks is costly and challenging. But, the current problem can be tackled by aggressive food distribution by expanding coverage under the NFSA to target the 190 million Indians who, as per the World Hunger Report 2020, are undernourished. This would be a better strategy than trying to export from stocks of wheat, rice and sugar in violation of international trade rules.

A firm commitment by the government on the continuation of MSP and procurement at current levels for rice and wheat for the next few years will give immediate comfort to farmers. Simultaneously, two other reform pathways need to be pursued. One is the implementation of a very attractive MSP for major pulses, oilseeds and other products with generous, committed quantities to be procured in the next three years. This public policy measure will help move some production away from cereals to commodities that we import and will also help conserve water and the environment.

Further, the government needs to urgently reform the price subsidy mechanism in a calibrated manner. A part of the subsidy should be given as a direct payment based on the farm size irrespective of the crops grown. This mechanism would be PM Kisan plus. This safety net of a basic level of support would help farmers operate in an imperfect market dominated by large private players, and provide them a fair return by supplementing their price realisation. It has been successful in many countries. It would simultaneously complement the private ecosystem in agriculture, which the three bills in question seek to develop. Thereafter, the MSP system can be downsized to ensure a better fit to the consumption pattern of food.

This strategy, however, can be expensive. But for a country at India’s stage of development, where 99% of the farmers are low income and resource poor by international standards—their holdings are smaller than 10 hectares—and receive an average subsidy of only $282 per year, the subsidy must increase if our agriculture has to become globally competitive. Fiscal constraint alone should not be the determinant of policy in this critical area. Savings for the government must come instead from lower transaction costs by avoiding wasteful storage and inventory carrying charges. This could be a win-win for both farmers and the government.
Can the government bite this bullet?

(Author is IAS (Retired), Former Ambassador of India to the WTO. Views are personal.)

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