Supporting agriculture the smart way

MSPs won’t help. A per hectare income-support policy, with better identification of tenants and owners through transparent land records, could

Unless this PDS is reformed either by restricting this to, say, the bottom 30% of the population or raising the issue-prices to, say, half the economic cost of rice and wheat, giving a better deal to farmers is likely to blow up the fiscal of the central government.
Unless this PDS is reformed either by restricting this to, say, the bottom 30% of the population or raising the issue-prices to, say, half the economic cost of rice and wheat, giving a better deal to farmers is likely to blow up the fiscal of the central government.

By Ashok Gulati & Shweta Saini

Several countries, especially the G-20, support their agriculture. Research evidence tells us that the best way to support agriculture in a sustainable and competitive manner is to invest in agri-R&D, agricultural-extension systems, and connect farmers to lucrative markets, domestic and external, by building efficient value-chains. Giving farmers their right to choose best technologies and best markets is fundamental to robust functioning of agri-systems and augmenting farmers’ incomes.

But in a democratic system, policies are not always framed on scientific basis. They are often influenced by various lobbies, including politicians who, at election times, offer freebies like free electricity, farm loan waivers as ‘doles for votes’. This short-sightedness results in sub-optimal or even irrational policy choices, which, in due course, harm the economy, environment, and even farmers.

Let us discuss here the case of minimum support prices (MSP), which many political parties are demanding to make a legal instrument. Legality of MSP means that no one is allowed to buy a MSP crop below MSP. If this demand is accepted, this will not only mess up the economy but also ultimately turn out to be anti-farmer. The reason is simple: It ignores the basic logic that prices are largely decided by the overall demand and supply.

In case of surplus, which usually happens at harvest time, the prices fall to clear the market. If MSP is above that market clearing price, no one from private sector will be willing to buy. In that case, the government will have to become the buyer of last resort. Else, farmers will be left high and dry with no buyers for their produce, making farmers worse-off.

The issue is how much government can buy of how many commodities, and what will be the cost to the government.

As of today, the Centre declares MSP for 23 crops—seven cereals (rice, wheat, maize, bajra, sorghum, ragi and barley), five pulses (tur, moong, chana, urad and masur), seven oilseeds (soybean, groundnut, rapeseed-mustard, sesamum, safflower, sunflower and nigerseed) and four commercial crops (sugarcane, cotton, jute and copra).

The main procurement, however, happens largely for rice and wheat to feed the public distribution system (PDS). The PD-issue-prices of rice and wheat are subsidised by more than 90% of their economic cost to the government. In 2020-21, the food subsidy bill was almost 30% of the net tax revenue of the central government, reflecting clearly a huge consumer-bias in the system.

Unless this PDS is reformed either by restricting this to, say, the bottom 30% of the population or raising the issue-prices to, say, half the economic cost of rice and wheat, giving a better deal to farmers is likely to blow up the fiscal of the central government.

It may also be remembered that the MSP regime has its genesis in 1965, when India was hugely short of basic staples and living in a ‘ship-to-mouth’ situation. It was an indicative price (not legal price), and procurement of rice and wheat was done to give a support to farmers when they were adopting new seeds (HYV technology) and domestic procurement was to feed the PDS. But now, with granaries overflowing with rice and wheat, there is the need to rethink and redesign the procurement policy. In crop year 2020-21, about 60 million metric tonnes (MMTs) of rice and 43 MMTs of wheat were procured by Food Corporation of India (FCI). Nafed procured about 0.66 MMTs of pulses.

Even after procuring more than 50% of the marketed surplus of rice and wheat, the market prices of rice and wheat remained below MSP in several states. For example, in November 2020, market prices of paddy in Chhattisgarh were below MSP by more than Rs 300/quintal; in UP, the gap was about Rs 102/quintal. This situation prevailed widely in Bihar, Jharkhand, Assam and many eastern states. Similarly, in wheat, where the crop sold at below MSP in the two largest wheat-producing states (UP and MP). One of the reasons behind market prices hovering below MSP is possibly the large leakages from the PDS suppressing market prices.

If this is the situation in the case of rice and wheat, where even after procuring more than 50% of the marketed surplus, prices ruled below MSP, extending the system to cover all 23 crops under MSP will need a much deeper thought.

Our back of the envelope calculation, assuming only 10% of the production of the remaining crops (excluding sugarcane) is procured, shows it will cost the government about Rs 5.4 lakh crore annually to procure these other MSP crops. This cost is estimated based on economic costs of operation that are usually about 30% higher than MSP (in the case of rice and wheat, it is 40%). But, it appears that, despite this, market prices may rule below MSP, especially during harvest time. It also raises the question why only support these crops with MSP, why not other agri-produce, say, milk, the value of which is more than the value of rice, wheat and sugarcane combined.

One argument that is floated is that instead of physical procurement, one may use price deficiency payments (PDP), implying that government pays to farmers the gap between market price and MSP, whenever market prices are below MSP.

We know very well that Madhya Pradesh adopted this scheme (Bhavantar Bhugtan Yojana) in kharif 2017 for eight crops (maize, tur, urad, moong, soybean, groundnut, sesamum, and nigerseed) but had to give up the very next season as traders gamed it, widening the gap between market prices and MSP, and benefited massively from this scheme. And the government incurred heavy expenditure.

What’s the way out to give a better deal to farmers? It may be better to use an income policy, on per hectare basis, to directly transfer money into farmers’ accounts without distorting markets through higher MSPs or PDP. This can be improvised by better identification of tenants and owners, through transparency in land records. There is no easy substitute to ‘getting the markets right’.

Respectively, Infosys chair professor of agriculture, and senior visiting fellow, ICRIER

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