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  1. The MSP and Procurement Conundrum

The MSP and Procurement Conundrum

Speaking at the 37th foundation day celebrations of NABARD, the union finance minister, Arun Jaitley, gave a good food for thought to the audience when he said, “if there is any area in the economy where we can give example to the world and to ourselves of cooperative federalism, it is the agriculture sector. It can benefit the people more than what GST has done”.

By: and | Updated: July 23, 2018 4:28 AM
Representative Image: Reuters

Speaking at the 37th foundation day celebrations of NABARD, the union finance minister, Arun Jaitley, gave a good food for thought to the audience when he said, “if there is any area in the economy where we can give example to the world and to ourselves of cooperative federalism, it is the agriculture sector. It can benefit the people more than what GST has done”. Coming from a political leader who steered GST to its conclusion, this is not only commendable but worth implementing. We may add a footnote that similar coordination is needed amongst union ministries dealing with agriculture, food, food processing, fertilisers, water, rural development, and trade to evolve a holistic and common approach to agriculture and farmers’ incomes. It can start by creating an agri-council/cabinet.

The need for this coordination was also echoed in a recently released OECD-ICRIER report, “Agricultural Policies in India”. It can start with long overdue agri-marketing reforms, revisiting the Essential Commodity Act and APMC Act, to “get the markets right”. The Vajpayee government tried to usher in these reforms through the model APMC Act of 2003, and it would be only prudent for the Modi government to complete this unfinished agenda. “Getting the markets right” will ensure better and stable prices for farmers as well as consumers, and also augment farmers’ incomes in a sustained manner.
But, the Modi government has taken a different path. It has increased MSPs of 14 kharif crops to at least 50% above paid out costs of farmers including imputed cost of family labour (cost A2+FL). There is no economic rationality in fixing MSPs at 50% plus cost A2+FL. It is purely a ‘political price’, keeping in mind the coming elections. On a lighter note, soybean MSP at Rs 3399/qtl and ragi at Rs 2897/qtl bring back memories of Bata shoe-prices!

What is surprising is that a professional advisory body, namely the Commission for Agricultural Costs and Prices (CACP), has towed the government line as its mouthpiece. It has bypassed its own Terms of Reference (ToR) that requires it to look at demand and supply, domestic and international prices, costs, and inter-crop price parity while recommending MSPs. Many a times, the government of the day overrules CACP’s recommendations and announces a ‘political price’. It is routinely done in case of sugarcane, where CACP recommends a Fair and Remunerative Price (FRP), but states like Uttar Pradesh announce a much higher state advised price, and we reap the results of such misadventures in terms of mounting cane arrears, in turn making the sugar industry vulnerable.

States like Madhya Pradesh and Chhattisgarh just announced ‘political MSPs’ of wheat and paddy with hefty bonuses of Rs 265/qtl for wheat in MP and Rs 300/qtl for paddy in Chhattisgarh for the 2018-19 season as both states are headed for elections! But when professional bodies start recommending what the government of the day wants, bypassing their own ToR, two things happen: first, the credibility of the institution takes a hit pushing it to its eventual burial; and second, the government never gets the right professional advice, and in political cacophony, it can make economic blunders. The case of kharif MSPs is somewhat similar for the reasons explained below. But, let us first see which political regime—UPA-1 or UPA-2 or Modi government—has given the maximum MSP increases. The attached figures show that despite this so called historic decision, the average annual increases in MSPs have been the lowest (except ragi) during Modi government.

Next question is whether these MSPs can be effectively implemented. The attached figures show that market prices of most kharif crops are well below announced MSPs. Ensuring that farmers really get these MSPs will require a major coordination between the Centre and states, a point highlighted by Arun Jaitley earlier. Our take on this is that no matter how hard the government tries, it cannot procure even 25% of production of various kharif crops, except in paddy and cotton, as a robust procurement system does not exist for other crops.

Third is the issue of the cost of this scheme. In case of paddy alone, the government will incur an extra food subsidy bill of Rs 12,000-15,000 crore due to increased procurement, which we expect to be anywhere between 38-40 MMT. The grain stocks are already brimming with Food Corporation of India saddled with 65 MMT as on July 1, 2018, which is 58% higher than the current buffer stock norms. It is widely recognised now that higher MSPs are likely to make our rice exports globally uncompetitive, leading to further accumulation of stocks at home, and greater economic inefficiency. For other crops, the costs will depend upon how much the government procures.

It is worth recalling that setting procurement prices higher than global prices is not new in world history. European Economic Community (EEC) did it earlier, leading to mountains of butter and lakes of milk. Lately, China also raised MSPs of wheat, rice and corn substantially above world prices, leading to piling up of grain stocks touching 300 MMT in 2016-17. But China is learning from its mistakes and since 2014, it has been reducing its MSPs for rice and wheat and has removed corn from price support. On input subsidies, it has moved towards direct income support on a per hectare basis. Does India want to burn its own fingers first and then learn? Wisdom lies in learning from others’ mistakes and leap-frogging.

India needs to recognise that redressing farmers’ woes through procurement prices has a limit imposed by global prices, especially in surplus situations. The moment one crosses that limit, domestic stocks will start accumulating. Time has come for India to devise an income policy (DBT) for farmers. In that context, Telangana’s Rythu Bandhu scheme with direct investment support is interesting. It can certainly be refined and made WTO compatible.

The bottom line is the switching of a price policy to income policy approach to redress farmers’ distress. Can India do it? Only time will tell.

Ashok Gulati & Tirtha Chatterjee
(Gulati is Infosys chair professor for agriculture and Chatterjee is research associate at ICRIER)

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