05 Mar
Innovative strategy is required to legalise MSP with comprehensive cost considerations to address farmers’ genuine concerns around fair pricing without imposing a substantial burden on the exchequer
After more than 2 years, the farmers are on the roads to Delhi, agitating for their demands to be met at the earliest. About three years ago, the farmers were protesting against the three new laws by the Government of India as part of an effort of the Government to bring about structural transformation in the agriculture sector. At that time also, I had argued that the agriculture sector was greatly in need of reforms, as the reform process since 1991 had not taken the agriculture sector into its ambit. However, there was no proper consultation with the farmers, which led to them doubting the intentions of the Government and interpreting the laws in a negative manner. The protracted negotiations did not yield results, and eventually, the Government had to adopt a conciliatory approach and take back the reforms. It was expected that the Government would examine the issues raised by the farmers in consultation with them and arrive at an agreed reform package that would stimulate the productivity of our farms and provide a sustained higher level of income for the farmers. Strangely, for more than two years, the Government has not moved in this direction. The result is that the farmers are once again in a rebellious mood and are converging at Delhi, putting pressure on the Government to relent to their demands.
The main demands of the farmers are to make minimum support price (MSP) a legal guarantee, coupled with the calculation of MSP according to the Swaminathan Formula. The Government is trying to meet this demand midway by procuring a higher level of crops other than wheat and paddy, but to no avail, as the farmers are insisting that nothing less than making MSP a legal guarantee would be acceptable to them.
It would be interesting to examine the way in which the wheat and paddy MSP mechanism works. Only about 30 percent of the total production of the crops is procured under MSP. For example, the wheat crop in India is about 110 million tonnes, and the total procurement is only about 26.2 million tonnes. This means that a major portion of the crop is either used for self-consumption or sold in the market at prices less than the MSP. At best, about 30% of the farmers would be benefiting from MSP, and the rest would be getting a lower level of income, which would make it difficult for them to sustain themselves. The other interesting thing is that most of this procurement is region-specific. For instance, in wheat, Punjab procures 12.12 million tonnes, Madhya Pradesh procures 7.0 million tonnes, and Haryana procures 6.31 million tonnes. In UP, there is good procurement in western UP, but the same is not true for eastern UP. There is hardly any procurement from poorer states like Bihar. Thus, there is a great regional disparity in the extent to which farmers benefit from the MSP mechanism.
MSP is declared for 23 crops, which account for less than 28 per cent of the total agricultural output, meaning that 72 per cent of the agricultural output does not have the MSP cushion and faces market forces. The interesting thing is that the average growth rate between 2011-12 and 2021-22 is higher for these products than for those covered under MSP. For instance, the growth rate of poultry meat is 9.1 per cent, fisheries is 7.7 per cent, milk is 5.5 per cent, and horticulture is 4.5 per cent. This raises the question of whether MSP is the most efficient means of increasing agricultural output. Some economists, like Ashok Gulati, have argued that alternative means of handling market prices should be used to benefit farmers, such as removing export controls, removing stock limits, and encouraging future markets, warehouse receipt systems, and involving farmer producer organisations (FPOs) in the value chain. These measures would be far more effective policy interventions in favour of the farmers. The government should also decide whether it should intervene every time in favour of the consumers the moment there is a rise in the domestic price level at the expense of the farmers.
Agricultural economists have calculated that the total value of agricultural output in India for the 23 crops for which MSP is announced is about 10 lakh crores, and it is argued that if MSP is made a legal guarantee and the entire crop has to be procured by the government, then this would be a huge drain on the exchequer. This is besides the huge cost and logistic nightmare of storage, handling, and transportation. MSP as a legal guarantee is found to be impractical by proponents of this argument.
However, the reality is that it is not necessary for the government to procure the entire produce. Even today, for wheat and rice, a small percentage is being procured under MSP. My experience as Managing Director of NAFED, the agency which procures Oilseeds and pulses, has been that very often an intervention of about 5 to 10 percent procurement pushes up the market price to the MSP level. Thus only a small quantity would be required to be procured to maintain the market price at the MSP level, and the cost to the exchequer would not be prohibitive. Further, there is a crying need for diversification into crops other than wheat and paddy, and this can only be possible if the farmer is assured of equally good returns on other crops, and this is possible if MSP as a legal guarantee operates for all the 23 crops. We are aware of the damage to the soil fertility and groundwater level that is being caused by paddy sowing in Punjab. If the farmer gets equal or better returns on other crops, he would be only too willing to diversify.
In addition, there is also a possible solution of the Government not buying the crops at MSP but paying the price differential directly to the bank accounts of the farmers. The digital financial infrastructure will make this possible, and the Government will not have to worry about the huge logistics of storage, etc. This was tried out in Madhya Pradesh for some crops but ran into the problem of cartelisation by buyers who artificially pushed down the prices. However, it is possible to create an institutional and regulatory framework to handle this kind of problem.
The problems faced by the farmers are genuine and cannot be pushed under the carpet. The issue of not getting a fair and remunerative price is a reality and it requires a solution. The value of MSP must take into account all the costs of production, both direct and imputed, and making MSP a legal guarantee would assure a fair price to the farmers and would not involve that much of a cash outflow from the Budget. Innovative, out-of-the-box thinking, political will, and administrative leadership can certainly resolve the problem.
