Punjab farm subsidy higher than annual income for farmers in rest of country!

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Updated: Dec 02, 2020 7:37 PM

In response to a question on whether the new laws should be amended to say private traders will have to pay at least the MSP for all crops – this is a demand the Congress party has been making – Rajan does say “if you have set an MSP, by all means enforce it where you can”.

Already in 2018, the government had circulated the model draft agricultural produce market committee (APMC) law which only a few states bothered to implement and that too after tweaking the provisions.

When an economist of the calibre of former RBI Governor Raghuram Rajan joins the issue of the new farm laws (https://bit.ly/39zmd3i) and suggests all is not okay, it does seem like a good idea to re-evaluate them. It is true Rajan doesn’t make too many categorical assertions in his interview to journalist Barkha Dutt and when he talks of farmers being pushed into the hands of “conglomerate buyers, multinationals” – who will squeeze them, it is blithely assumed – once the mandis have been finished off (another assumption), he does say this is an argument made by those opposed to the new laws.

Yet, the fact that he repeats the assertion that the mandis will die once there is competition to them after the new farm laws kick in does suggest that he is, at the very least, sympathetic to this view; never mind there is little evidence from other sectors to suggest that existing markets die when new ones are also allowed to increase competition. The state and central governments, of course, need to ensure the new markets work by giving them land, low-cost loans etc.

And in response to a question on whether the new laws should be amended to say private traders will have to pay at least the MSP for all crops – this is a demand the Congress party has been making – Rajan does say “if you have set an MSP, by all means enforce it where you can”. That, in a nutshell, is really the point Punjab’s agitating farmers are making.

The problem with the argument that farmers will be pushed into the hands of evil traders once the MSP system is finished off – for the record, the news laws are not even diluting MSP – is that it ignores the reality of just how limited the whole MSP system is right now. Less than 10% of all crops are today sold at the MSP to government procurement agencies, so if the majority of farmers are selling to private traders even today, it is difficult to argue a catastrophe is around the corner if the MSP system goes; that is why the agitation is really limited to states like Punjab.

Two, there is a much higher growth in the output of fruits and vegetables or milk than there is for cereals like wheat and rice; it does seem unlikely the output would be growing so fast – 3-5 times that of cereals according to agriculture expert Ashok Gulati – if traders and ‘conglomerate buyers, multinationals’ were squeezing the farmers in the manner being described. That, in fact, is the reason why Punjab’s farm growth has plummeted to 1.9% per year since 2005-06 while that of the rest of the country is a much higher 3.5%.

It is also important to keep in mind that, while no states are protesting against this, the current system is hopelessly biased towards a few states like Punjab and Haryana; Punjab accounts for 13% of the country’s rice and wheat crop, yet 26% of what FCI procures is from the state. Indeed, one of the reasons why Punjab grows so much wheat and rice, in turn, is linked to this FCI benevolence and very large subsidies, both now and in the past when government investment gave it the country’s best road and irrigation network.

While the state’s farmers already get Rs 13,275 crore of electricity and fertiliser subsidy, the FCI system adds a considerable amount to this as well. FCI had around 42 million tonnes of extra wheat and rice stocks in June, and since it costs a lot of money to carry this stock – given the high price of purchase, liquidating it is difficult – this is an implicit subsidy to the farmer. According to FCI data, the economic cost of wheat is Rs 2,684 per quintal and Rs 3,727 for rice. From this, reduce the cost of purchase – Rs 2,221for wheat and Rs 3,163 for rice – since this is not being borne every year for the old stocks that FCI has. Multiply this number by FCI’s excess stock that can be attributed to Punjab; since 26% of FCI’s procurement comes from Punjab, the same ratio can be applied to the excess stock.

Based on this, it turns out, Punjab’s farmers get an additional Rs 5,600 crore of subsidy. Add this to the fertilizer and electricity subsidy and you get an annual subsidy of Rs 18,875 crore; divide this by the 1.09 million farming households the state has and, it turns out, each household gets an annual subsidy of Rs 173,165.

Yes, as State Bank of India’s October Ecowrap pointed out, according to the NAFIS survey of FY17 put it, the average annual household for all agricultural households in the state was Rs 107,000; while this would have grown in the past four years, the short point is that the subsidy the Punjab farmer gets is much higher than what farmers earn in the rest of the country!

To get back to Rajan’s argument on trying to ensure all farmers are paid the MSP, it is clear private traders will not pay this as it is not a market-clearing price; on average, mandi prices are 20-50% lower than the MSP for most crops. In which case, the government – FCI? – will need to step in to buy all the crops. And if the government is paying higher than market prices for 23 crops, why shouldn’t this be extended to fruits and vegetables or milk etc? Essentially, this is a slippery slope and, from the point of view of the fiscal impact, the costs can run into lakhs of crore rupees. By agitating in the manner they have, Punjab’s farmers have only highlighted how pampered they are since the same facilities clearly cannot be given to other farmers across the country. Whether their holding the capital hostage makes the government blink remains to be seen.

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