A key debate after the enactment of three farm-reform laws and the subsequent farmer protests is about the issue of federally-fixed minimum support prices (MSPs) – a system guaranteeing farmers assured prices for their produce through procurement. Since MSP is an obligatory, not a statutory exercise, farmers have demanded a legislation to prohibit sale of any farm produce below these minimum prices. They fear that MSPs will not be enforced, if private players come up.
In what is clearly a political damage-limitation exercise, the Modi government has stepped just short of legislation and said that it was ready to give ‘written assurance’ to the protesting farmers that the existing MSP regime for procurement will continue. Besides, of course, the government has agreed to make necessary amendments on at least seven issues, including one to allay fears about the weakening of the mandi system. So far, the farmers are not buying these overtures.
However, a law or ‘written assurance’ making MSPs the legal floor price defies economic logic. The government sets MSPs for 23 crops, but it is largely effective only in case of rice and wheat, because it buys only these two commodities in sufficiently large quantities. For some wheat and rice farmers, MSPs are an assurance that the government will intervene, if market rates fall below that threshold, thereby helping avoid distress sale. This policy was salutary when India faced acute food shortages.
Indeed, the MSP system was started in 1966-67 for wheat, which was then sold to the poor under subsidised rates under the public distribution system. In 1966, wheat’s MSP was Rs54 per quintal. Currently, it is at Rs1,975 per quintal. This may look like a price jump of sorts but it is not. In the last 10 years, the MSP growth rate for most of the crops has declined for both rabi and kharif. Amid the ongoing protests, the government recently increased MSP for six rabi crops. Still, MSP growth rates for wheat and paddy are reportedly at the lowest in the last decade, at 2.6 per cent and 2.9 per cent respectively. Somebody in the government should have explained this to the farm leaders before tabling the bills in Parliament.
MSP is fixed by the government twice a year, ostensibly to encourage higher investments and production of crops, as prices of agricultural commodities often vary due to various factors. But according to a 2012-13 report of the National Sample Survey Office, less than 10 per cent of farmers sell their produce at the MSP fixed by the government. An analysis of 10 crops sold in September this year shows that, in 68 per cent of instances, crops were sold below the MSP. Yet, MSP has become a sticking point in negotiations.
Why is this so? Except in the case of wheat and rice, which the Food Corporation of India actively procures under the PDS, the major problem with the MSP is lack of government machinery for procurement for all crops. Also, the farmers of states where the grain is procured completely by the government benefit more than those in states that procure less are often affected. For example, in Punjab, about 95 per cent of paddy growers benefit from MSP while, in Uttar Pradesh, only 3.6 per cent of the farmers benefit. Perhaps, that is why the current agitation has greater resonance among the farmers of Punjab.
What started as a measure adopted to overcome a previous era of scarcity is now being revived in an era when we need farm policies to deal with surpluses. These policies need to be fundamentally different and should be geared to benefit the farmers as well as consumer. An MSP mechanism that ignores demand and global prices creates market distortions. If it is not profitable for traders to buy at MSPs, then the private sector will exit the markets. In such a scenario, the government cannot be a monopoly buyer. India’s agri-exports will be non-competitive, because the government’s assured prices will be higher than both domestic and international market prices.
Over the years, MSPs have led to unpublicised distortions in our economy. The system, for instance, has incentivised food grains over other crops, giving rise to imbalances of water and land resources and shifting land away from crops such as pulses and oilseeds, necessitating costly imports. A law barring purchases of the other 21 crops below MSPs by any private trader will also, immediately, fuel high inflation. Every one percentage point increase in MSPs leads to a 15-basis point increase in inflation. Higher MSPs could also upend the RBI’s inflation targets, hurting economic growth. Nobody disagrees that farmers need support, but policies need to be carefully assessed before they are implemented, even at gunpoint.