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Farm distress: MSP, loan waivers vs direct income support

By: and |
New Delhi | Updated: January 7, 2019 7:25:31 AM

MSPs or loan-waivers cannot reach more than 20-30% of peasantry and distort the market much more than direct income support policies

MSP,farm loan waivers , direct income support, Madhya Pradesh, Chhattisgarh, Rajasthan, MSP for paddyThe most pressing problem of Indian farmers today is the persistently low levels of market prices.

The loss of BJP/NDA in the recently concluded state elections in Chhattisgarh, Madhya Pradesh, and Rajasthan has given the political party a bitter jolt. The party had dodged the reality and gravity of farm distress until then, with its Union agriculture minister equating farmer agitations with ‘political drama’. However, they not only have acknowledged the crisis now but are also looking for ways to address farmers’ issues.

The most pressing problem of Indian farmers today is the persistently low levels of market prices. From onions to potatoes, pulses to oilseeds, prices of most crops continue to stay much below expectations and normal trends. Ideally, the solution lies in broad-based holistic reforms of agri-markets. The stranglehold of APMCs need to break, Essential Commodities Act (ECA of 1955) needs reforms, negotiable warehouse receipt (NWR) system needs scaling-up, value-chains, based on AMUL model, are needed for most crops, restrictive land laws need to open up, contract farming needs acceptance and promotion and agri-exports need vision and a conducive environment to grow. The PM embarked on reforms for some of these issues, which need further deepening and broadening before they can deliver. These reforms entail a longer gestation period and, now, when Lok Sabha elections are just four months away, demand for quick-fix solutions is soaring.

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Three of the biggest solutions being discussed are: higher minimum support prices (MSPs), loan waivers, and direct income/investment support. Here, we evaluate the three to identify one that can be a winner, politically and economically. For political acceptance, we evaluate the scheme for its reach among targetted beneficiaries, i.e. the peasantry, and on economic grounds, costs and benefits are compared.

Congress president, Rahul Gandhi, promised a higher MSP for paddy (Rs 2,500/quintal) in Chhattisgarh and loan waivers in all three states that Congress won. He is quite likely to take this model to the Lok Sabha elections. Prime minister Modi had also gained earlier from similar promises—during the UP election, where he promised a loan waiver and higher MSPs for all 23 commodities. There was a difference, however, in the MSP increase formula offered by the two parties. While Rahul Gandhi-led Congress promised an MSP increase of 50% over C2, i.e. the comprehensive cost, PM Modi promised the same increase over A2+FL, i.e the paid-out costs plus family labour. It may be noted that C2 is about 38% higher than A2+FL.

Irony of a MSP policy is that it reaches limited number of farmers. As per NSSO 2012-13, less than 10% of peasantry sold their produce at MSP. This percentage, though, is a little higher for sugarcane, wheat and rice farmers. If one accounted for increased procurement of pulses and oilseeds during 2016-17 and 2017-18, this percentage is still not likely to exceed 20%. Additionally, MSP operations mostly benefit bigger farmers that have marketable surplus and exclude much of the country’s marginal farmers who produce little surplus. Besides, the large inefficiencies and market distortions caused by a MSP-regime makes it an unfavourable choice. For example, even now, wheat and rice stocks with government (i.e. 45.4 mmts) are more than twice its buffer-stock norms (i.e. 21.4mmts), reflecting massive economic inefficiency, not counting the leakages and corruption in the entire MSP operations of procurement, stocking and distribution.

Let us now consider the loan-waiver option. As per NABARD’s financial inclusion survey (NAFIS), between July 2015 and June 2016, 43.5% of all agri-households (agri-HHs) took loans. Of these, 69.7% took institutional loans (60.5% took only institutional loans and 9.2% took both institutional and non-institutional loans). This means that about 30.3% (i.e. 69.7% multiplied with 43.5%) Indian agri-HHs took loans from institutions. A loan-waiver is thus likely to benefit only these 30%, or an even smaller subset of it, if certain conditions are imposed on loan waiver schemes. The remaining 70% of the Indian peasantry, who do not access institutional credit, will not benefit from this scheme. Such high rates of exclusion must be the singular most important failure of our banking system concerning financial inclusion.
The conclusion thus is that through higher MSPs, or through loan-waivers, one cannot reach more than 20-30% of peasantry. This limited reach, therefore, cannot redress the widespread grievances of Indian farmers. Farmer leaders as well as governments, who swear by farmers’ interests, need to make note of this important point.

The third option, pioneered by Telangana, is income/investment support through Rythu Bandhu Scheme (RBS). Telangana started RBS in May 2018 whereby it gave Rs 4,000 per acre to every farmer. This transfer was made twice a year, coinciding with the two cropping seasons. By directly giving cash, the KCR-government aimed to support input purchases of farmers. The scheme is said to reach almost 93% of landowners and has clearly yielded political benefits to KCR with a landslide victory.
In terms of costs, our estimates show that a national farm-loan waiver is likely to cost about Rs 4-5 trillion, an RBS-style income transfer is likely to cost about Rs 2 trillion (with some improvisation to include tenants, restricted to actual cropped area), and a price-deficiency based payment or actual procurement under MSP operations, if done at a large-scale, is going to cost about Rs 1-1.5 trillion (depending on whether market prices are 20% or 30% below MSP), notwithstanding the fact that such MSP operations are likely to be subjected to large-scale corruption. MSP policy and loan waivers are much more distortionary than income/investment support policies.

Cost sharing between the Centre and states is needed to bear such a burden. Eventually, income policies should combine with direct cash transfers in lieu of fertiliser and power subsidies to make it much more meaningful.

Time is ripe for action now, and one hopes the government acknowledges the reality of farm distress and undertakes to resolve it on priority.

Gulati is Infosys chair professor for agriculture and Saini is senior consultant at ICRIER

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