Why India should let go its MSP plan and adopt per-acre cash payments for farmers

By: | Published: October 19, 2018 2:50 AM

Though it is early days yet, it is clear the government’s plan to woo farmers by promising them a minimum support price (MSP) that equals at least 1.5 times their A2+FL costs is not working.

agriculture sector, agriculture industryAs has been pointed out by various economists in the past, the MSP plan is riddled with problems.

Though it is early days yet, it is clear the government’s plan to woo farmers by promising them a minimum support price (MSP) that equals at least 1.5 times their A2+FL costs is not working. According to data from the Agmarknet portal run by the government, between October 1 and 9, prices of nine summer crops were ruling at anywhere between 11% and 55% below the higher MSPs announced by the government with great fanfare. In the case of moong, for instance, prices in the Lalitpur mandi in Uttar Pradesh were 54% below the MSP; it was 36% in the case of nigerseed in Dindori in Madhya Pradesh and 11% for soyabean in Ujjain in Madhya Pradesh. And this is despite the government asking states to be more proactive in purchases from farmers and enhancing the government guarantee for Nafed to buy pulses and oilseeds by Rs 16,550 crore, taking its budget to Rs 45,450 crore for this fiscal.

As has been pointed out by various economists in the past, the MSP plan is riddled with problems. For one, it works only in those states where there is already a robust procurement system already in place—that is, in states like Punjab and Haryana, Madhya Pradesh, Chhattisgarh, etc, and primarily for wheat and rice. Two, as was seen in the case of Madhya Pradesh’s Bhavantar scheme, it is prone to gaming. Few, if any, mandis are truly competitive, so once traders know they benefit more from a lower mandi price—and hence a higher differential from the MSP—they ensure the price is lowered. In Madhya Pradesh, while prices were generally lower than in other states, after Bhavantar, the difference became even larger; finally, the scheme had to be rolled back as the state could not afford it.

In which case, it is a better idea to try a version of Telangana’s cash payments. FE had estimated that the scheme would cost Rs 175,000 crore if market prices fell to 20% below the MSP and Rs 260,000 crore if the price fell to 30% below MSP. While Icrier had lower estimates for the cost of a cash scheme, this was because it assumed the government would only have to buy the marketable surplus. FE, on the other hand, assumed that the entire produce would have to be bought by the government—since it was offering higher MSPs than the market price, farmers would sell at the higher price and buy it back later when market prices fell.

According to Icrier professor Ashok Gulati, a Rs 10,000 per hectare cash subvention will cost Rs 1.97 lakh crore across the country, a number not too different from what the MSP scheme would cost; while the per acre amount looks quite small, it is broadly in keeping with what farmers earn from most crops. Given how the scheme benefits farmers without distorting farm practices, and how it can’t be manipulated by traders either, the government would do well to look at using it instead of the proposed price-deficiency one. Indeed, the MSP-based price-deficiency scheme also makes various exports—such as those of rice and cotton—uncompetitive since the new MSP is quite high; the per-acre cash scheme, on the other hand, doesn’t cause this problem either since it does not affect the market price. Such incentives that are not crop-specific, in fact, are what countries like the US offer and the added advantage is that they are WTO-compatible.

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