The way forward on MSP: Important to explore fiscally prudent, administratively convenient options

March 1, 2021 6:15 AM

Public procurement needs to continue for staple cereals, but farmers of non-staple food crops need to be provided with direct income transfers

Also, if rice and wheat holdings that get the benefit of MSP are excluded, then this expenditure may be even less.Also, if rice and wheat holdings that get the benefit of MSP are excluded, then this expenditure may be even less.

By CSC Sekhar

The stalemate over the farmers’ protests appears to be a long-drawn one and the implementation of the recent farm laws appears stalled for now. One of the key demands of farmers and the opposition parties is to make the minimum support price (MSP) a legal right. What is the feasibility of this move and its implications, both fiscal and administrative? Are there better alternatives?

Making MSP a legal entitlement makes it a justiciable right, and there are two ways of ensuring this. The first is through physical procurement by the government. The second is to allow farmers to sell in the private market and if they get a lower price than MSP, then to reimburse the difference between the two. Such a payment is called ‘deficiency payment (DP)’. Procurement is the best option for ensuring MSP. However, there are two major constraints to this—physical storage capacity and administrative capability (governance), which can limit the quantum of procurement. Thus, farmers also need to be supported through DPs.

The total production of 14 major food crops, which include staples rice and wheat along with three coarse cereals, five major pulses and four major oilseeds, was 321 million tonnes (MT) in 2019-20. A part of the production is kept by farmers for home consumption and other uses. Using the current marketable surplus ratios (MSR) from the ‘Agricultural Statistics at a Glance 2019’, the expected marketed surplus (MS) of these crops works out to 261 MT. But the storage capacity available with the Food Corporation of India (FCI), state agencies, the Central Warehousing Corporation and the cooperative sector is only about 98 MT as per estimates by the Committee for Strengthening Negotiable Warehouse Receipts (2015). Given this storage capacity, which also holds the existing grain stocks and stocks of other crops like cotton, it will not be possible for the government to procure more than 30% of the marketed surplus, which is about 78 MT. The rest needs to be picked up by the private market, for which DPs are needed.

Fiscal costs

—On public procurement: Rice and wheat are procured by the government and distributed through the PDS at a highly subsidised issue price of Rs 3 per kg and Rs 2 per kg, while the economic cost is Rs 36 per kg and Rs 24 per kg, respectively. The difference between the economic cost and the issue price constitutes the food subsidy. If MSP is legalised, the remaining crops also need to be procured and also disposed in an orderly way. Since assured procurement will very likely induce much larger supply in the short run, these crops may need to be sold at subsidised prices.

Assuming that the ratio of economic cost and MSP of these crops is similar to rice and wheat (which is 1.78 in the last four years) and the crops can be disposed at 50% of their MSPs, the subsidy to be paid to the FCI and other agencies works out to Rs 2,56,250 crore annually.

—On DP: Since only 30% of the production can be procured by the government owing to storage constraints, nearly 70% of the MS needs to be absorbed by the market. When the market price falls below MSP, DP needs to be paid equalling the difference between the two. The steeper the fall of market price below MSP, the larger is DP. Assuming an average fall of 20% of the market price below MSP, which is a more likely scenario for most crops considered here, the quantum of DP is estimated to be Rs 83,841 crore annually.

Thus, the total expenditure on account of government procurement and DPs works out to Rs 3,40,091 crore annually. From this, subtracting the expenditure already incurred on procurement of wheat and rice as food subsidy in 2019-20, which is Rs 1,08,688 crore, we get the additional expenditure needed for providing MSP to the remaining crops, which works out to Rs 2,31,403 crore. This constitutes a 95% increase in the food subsidy budgeted in the 2021-22 Union Budget (which is Rs 2,42,836 crore)!

Direct payments

It is important to explore other options that may be fiscally prudent and administratively convenient. One such is direct payments to farmers. However, it needs to be noted that during the Covid-19 crisis as well as earlier food crises in 1975 and 2008, India’s buffer stock system served the country exceedingly well. There is also a large PDS of 80 crore beneficiaries to cater to. Thus, the MSP procurement system needs to be continued for staple foodgrains and, if possible, be extended to pulses.

However, a different approach is needed for non-staple food commodities. For many of non-staple commodities, MSPs are announced with little or no procurement. This is really ineffective. Thus, a gradual movement to an income-based support system is needed. PM-KISAN is currently attempting this, but the support under the programme is grossly inadequate. Also, the economic rationale for the payment of Rs 6,000 per farm per annum is not clear and does not appear to be based on any systematic analysis of costs and returns of farming. Therefore, using the data on crop and state-wise A2 cost of cultivation published by the Commission for Agricultural Costs and Prices (CACP)—which represents the basic costs incurred by the farmer on inputs and land leased, area under various crops in different states, and the number of small and marginal holdings in the country—the weighted cost of cultivation (with area under crops and number of holdings as weights) works out to Rs 16,769 per farm. This is nearly 2.8 times the current payment under PM-KISAN. Data of 2015-16 has been used for these computations so that direct payments do not affect the marginal production (current production). Given the fiscal space available to the Union government, it may not be possible to cover the entire cost. Covering 50% of the cost will entail an annual expenditure of Rs 1,22,187 crore, which is much less than the estimated expenditure for procurement plus DP system. Also, if rice and wheat holdings that get the benefit of MSP are excluded, then this expenditure may be even less.

If MSP is legalised for all food crops considered here, the budgeted food subsidy for 2021-22 will increase from the current 1.2% to 2.3%. In case of enhanced PM-KISAN payments, the corresponding increase is from 0.4% to 0.6%. Since DPs do not affect marginal production, farmers are likely to align their supply with the demand conditions.

In conclusion, public procurement needs to continue for staple cereals, but farmers of non-staple food crops need to be provided with direct income transfers—these are fiscally prudent, obviate the need for physical procurement and storage by the government, do not distort current production, and also provide a basic income to farmers. These will also address the main concern over the recent farm laws related to the vulnerability of small and marginal farmers and may help these farmers to avoid distress sales.

The author is professor of Economics, Institute of Economic Growth, University of Delhi

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