Business Today

Fixing MSP

The government would do well to fix flaws in the basic MSP structure before rolling it out for all crops.
Joe C. Mathew   NA     Print Edition: May 20, 2018
Fixing MSP

Avik Saha, Co-convenor of Jai Kisan Andolan campaign, has had a new routine from April 3. Every day, he collects and shares the real prices farmers fetch in mandis (agricultural markets) for a crop - he monitors about 20 crops - on the social media. The "MSP (minimum support price) Alert" initiative reveals the difference between the government fixed MSP and the actual money farmers take home. The results, so far, indicate that the spot prices farmers get when they sell their produce in major mandis, across India, are much below the MSP for all the crops.

Recently, Saha and his team worked out a formula to calculate what this means for the farmers' promised revenue at a consolidated level. For instance, they estimate that by April 5 the tur, arhar and red gram farmers of Maharashtra would have got `1,125 crore more than what they actually received, had their produce fetched the MSP fixed by the government. Similarly, during the March 1-April 18 period, the mustard farmers of West Bengal got `54.38 lakh less than what procurement at MSP rates would have fetched. "The nation needs to know and understand if farmers are being cheated and looted at agricultural markets," says Yogendra Yadav, President, Swaraj India, the socio-political outfit that leads the Jai Kisan Andolan.

As the Modi Government plans to roll out MSP for all crops from this kharif (monsoon) season onwards, the daily reminder acts as a wake-up call for the government to correct the systemic flaws in India's existing MSP regime. But it may not be easy.

The Issue

During his Budget speech on February 1, Finance Minister Arun Jaitley announced the government's decision to declare MSP for all the kharif crops at one and half times of their production cost. But the farmer groups, including organisations like that of Saha, opposed the government's definition of the 'production cost'. They argued that MSP has no meaning if it does not cover the actual cost incurred by the farmer. The farmer organisations demanded that the production cost should include the input cost, labour cost and also the imputed rent and interest on owned land and capital. Two months later, that debate seems to be settled as the focus has shifted from calculating an ideal MSP to securing what has already been declared as MSP. The MSP Alert indicates that farmers are not getting even the less ambitious MSP (which is roughly 50 per cent extra over the actual paid-out cost and imputed value of family labour) for most crops. And that exposes the weakest link in the whole MSP game - inadequate procurement by public sector agencies at a price promised by the government.

Procurement Perils

If MSP Alert tells us that the tur farmers of Maharashtra are not getting the government declared price for their produce, the agriculture ministry data gives us the reason for that. Of the 9.83 lakh metric tonnes of tur produced in Maharashtra in 2017/18, only 8 per cent, or 0.74 lakh metric tonnes were procured by the government at MSP rate. Though the data was last updated on March 6, 2018, it gives an idea of how procurement of MSP crops has progressed in the country last year. Except Telangana, Karnataka and Andhra Pradesh, which procured 34, 35 and 10 per cent of the total tur production, respectively, procurement of this pulse was in low single digits in all other states in 2017/18. The procurement was zero in Gujarat, which produced 3.14 lakh metric tonnes of tur dal during this period.

Of a list of 45 pulses and oilseeds - including tur, urad, moong, groundnut, etc. - procured from 11 states in 2017/18, the procurement percentage was less than 10 in 29 cases. In the case of paddy, only Punjab and Haryana saw nearly 100 per cent of their produce getting lifted by the government through public procurement. The two states accounted for bulk of the wheat procurement, too. The government might have announced MSPs for 23 crops, but a significant proportion of procurement happens only in the case of paddy, wheat and sugarcane. And it is the sugar mills and not the government that is responsible for the procurement of the last item.

Indeed, market prices of many of the key kharif crops fell way below the MSP in 2017/18. For instance, India produced 240 lakh metric tonnes of pulses and 300 lakh metric tonnes of oilseeds during this period. None of the schemes meant to cushion the price crash of these crops - price support scheme, price stabilisation fund, market intervention scheme, etc., - were effective during this year of record production. Siraj Hussain, former agriculture secretary, says that multiple factors led to the price slump. Increase in production was one, high import was another. Stock limits for private trade, government's consumer-friendly interventions and even demonetisation-linked disruption in cash flow might have impacted the prices last year, he says.

In fact, Finance Minister Jaitley had this in mind when he announced the decision to expand the scope of MSP. Immediately after the government decided to provide minimum price support to all kharif crops, Rajiv Kumar, Vice Chairman of NITI Aayog, was tasked with the job of finding a fool-proof way to implement it. The draft report, being considered by the government at the moment, gives three broad suggestions. It proposes a market assurance scheme - essentially procurement by the states and compensation of losses up to certain extent of MSP. It also suggests that if the sale price is below a certain level, then the farmers may be compensated for the difference between the MSP and actual price subject to a ceiling. Third option, says the report, is a private procurement and stockist scheme that will have private-, state government-empanelled entrepreneurs procuring crops at MSP and the government incentivising it through a mix of commission, policy and tax sops.

The larger question, though, is whether the problem is with the MSP design or the very concept of support prices.

Contranian View

Serious criticism against MSP and its extended scope has come from renowned agriculture economist Ashok Gulati. Along with his team of experts, he has voiced his reservations against MSP in a working paper, published by the Indian Council for Research on International Economic Relations (ICRIER) a few days ago. What is under attack is the second option considered by NITI Aayog - price deficiency payment (PDP) where the government promises the difference between the MSP and the market prices. The PDP or filling the price gap, as highlighted by the Jai Kisan Andolan activists, can be tricky as it is prone to manipulation by traders and lower level mandi functionaries and may end up helping them more than the farmers, despite the best intentions of the government. In fact, the working paper by Gulati's team is an analysis of a model PDP scheme that was introduced by the government of Madhya Pradesh last year to fight farm distress. The scheme called Bhavantar Bhugtan Yojana (BBY), was abruptly withdrawn in March 2018 due to operational challenges.

Gulati and fellow researchers also state that MSPs based on cost plus pricing, completely ignoring the demand side, will lead to major distortions in the agri-marketing system. "The resulting efficiency losses may far exceed the support the government is intending to extend to farmers," they point out. The crux of their argument is that raising MSPs with no supporting procurement mechanism is unlikely to mitigate farmers from the supply shocks and price risks. It will only lead to either large PDP or huge procurement costs. "We believe that in due course we need to decrease the number of commodities for which MSPs are announced. One may also argue that with passage of time, MSPs have to be substituted with direct income/investment support that will be less distortionary."

There are no short-term solutions for farmers' income problems. India has to solve its procurement, storage and marketing problems for agriculture to prosper. Gulati and colleagues call for heavy government investment in marketing infrastructure, storage and food processing along with changing the Agricultural Produce Market Committee Act (APMC) to allow direct buying from farmer producer organisations (FPOs), bypassing the archaic mandi system.

On March 9, presiding over a consultation meeting on the mechanism for implementation of MSPs, NITI Aayog's Kumar also had some words of caution for the state governments. He wanted all the states to immediately modify the APMC Acts and emphasised their role in the successful implementation of such schemes. The state and Central governments have historically relied on MSPs to build a farmer-friendly image. It would not be surprising if the government approves some or all of the suggestions of NITI Aayog. But unless the procurement challenge is solved, it's going to be a tricky intervention.

Narendra Modi will seek a fresh mandate in a year from now. Farmers' ire will be the last thing the government would want to face in an election year.


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