Mandatory Minimum Support Price (MSP): Watering a dangerous idea

If MSP gets mandated, we are staring at disappearing export markets, a disrupted domestic supply chain, unmanageable surpluses and an unaffordable subsidy burden

Mandatory Minimum Support Price (MSP): Watering a dangerous idea
Add to this the scenario of a mandated MSP.

By T Nanda Kumar

A law to ensure Minimum Support Price (MSP) is the new slogan. Different groups, politicians, farmers, activists and others support this. The farmers have a right to demand what they think is good for them, but there are dangers ahead. A mandated support price implies that no private trader can buy below such price. Typically, violators will be prosecuted in such a legal framework!

What are the implications of such an idea?
Let me state upfront that continued financial support to farmers is essential. One should not forget that farmers, with support from the MSP system, have fed millions of Indians and ensured food security. Highly input-intensive agriculture supported by public procurement continues to be our strategy for food security.

Over time, however, demand has changed; the climate has become variable, and the aspirations of farmers have risen. It is time to focus on farmers’ incomes, sustainability and nutrition. Some of this has happened already. Changes in markets and production are reflected in the composition of the gross value of output in agriculture and allied sectors. The ‘MSP crops’ (mainly, cereals, oilseeds, pulses and fibres) add up to only 25% of the value (2018-19). Farmers who produce the other 75% (mostly perishables) are dependent on the market and its price fluctuations.

Currently, 23 crops are under the MSP regime, the most seminal being paddy and wheat. The procurement of these crops is supported by the Public Distribution System (PDS). Till a decade ago, the question before the policymakers was ‘will the MSP give us enough grains to meet the PDS requirement?’ There were prolonged discussions (mostly during 2006-08) about procurement price being kept higher than the MSP. Things changed later, mainly on account of increased production and three important decisions: (i) to keep a strategic reserve of 5-6 million tonnes in addition to buffer stocks, a result of the serious shortage of public stocks in 2006 followed by a global food shortage in 2008, (ii) the enactment of the National Food Security Act guaranteeing highly subsidised food to almost two-thirds of the population, resulting in increased pressures on procurement, and (iii) the decision to calculate the MSP at cost (A2+FL) plus 50% (2018). The Commission on Agricultural Costs and Prices (which was constituted to advise on the price policy for selected commodities, with a view to evolve a balanced and integrated price structure against the perspective of the overall needs of the economy and with due regard to the interests of the producer and the consumer) was reduced to doing simple tasks of calculating the cost of production and adding 50%. The procurement of rice and wheat went up to about 90 million tonnes (51mt rice and 39 mt wheat) this year, which is about 50% more than the requirement (a surplus of about 25-30 mt). Procurement, as a percentage of production, is rising while production is also rising (see graphic).

With non-traditional states like Madhya Pradesh, Odisha, Chhattisgarh stepping up, procurement has touched 43% of the production of rice and 37% of wheat. When UP and Bihar catch up, procurement could reach 50% of production. Apart from the huge logistical challenges, food subsidy will balloon to unsustainable levels. What will happen to the private market and food inflation when the government is forced to sit on such huge stocks is anyone’s guess. Add to this the calls to expand the basket of 23 commodities. There was a demand to include milk a few years ago. The Kerala government has announced a MSP for selected vegetables (interestingly, prices fixed are A2+FL plus 20%). The demand for C2 costs as the basis for MSP (about 30% more) can get stronger. The economic cost of wheat and rice, at present, is about 40% more than MSP costs. Imagine the size of the food subsidy bill!

Add to this the scenario of a mandated MSP. The private sector (and that includes all small traders) will have no option but to stay out of the market or cheat on the price. The state agencies will end up buying almost everything and will need to resort to ‘Open Market Sales’ to meet consumer demand. Traders can sit back, buy from FCI, and make a neat profit, while the government loses huge sums of money.

To understand this scenario better, let me examine the case of sugar. Sugarcane, unlike other commodities, has a statutory minimum price (called Fair and Remunerative Price , or FRP), that sugar mills are mandated to pay. In addition, states like UP have a state advised price, often higher than the FRP. During the last sugar season, production of sugar (thanks to the increase in productivity), in spite of adverse weather conditions in Maharashtra and Tamil Nadu, stood at 31 mt, at least 25% more than the domestic requirement. The government was compelled to (i) announce a pre-determined price and buy substantial quantities of ethanol through PSU oil companies, (ii) announce a ‘nudged and incentivised’ export of 6 mt of sugar with a subsidy of about Rs 10/kg of sugar (Rs 6,000 crore), and (iii) fix a minimum ex-factory sale price of Rs 31/kg of sugar, imposing an involuntary burden on the consumer. Consumers paid more and taxpayers paid Rs 6,000 crore because cane price got fixed at about 75% above cost (A2+FL) in 2018-19. Our sugar prices rule far above international prices. This subsidy regime is subject to a challenge in the WTO, and if non-compatible, we will have serious problems in our hands. This year also, we are staring at a large surplus. Clearly, this is not the way forward!

Open-ended MSP itself is a big challenge at present. If it is decided for any reason to ‘mandate’ MSP, we are staring at disappearing export markets, a disrupted domestic supply chain, unmanageable surpluses and an unaffordable subsidy burden. In the current scenario of complex demands in a surcharged atmosphere, a tectonic shift to a highly decentralised food and agriculture management, giving more legal authority, financial support and responsibilities to states may be an option worth considering.

The author is Former secretary Food & Agriculture, Govt of India. Views are personal

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First published on: 08-12-2020 at 06:15:09 am