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MSP: The latest war frontier

It is a moot point whether a legislated MSP is justified or not. But the arguments infavour of augmenting average farmer’s income cannot be dismissed at all. — KK Srivastava


Two facts are incontrovertible. One, income from farming is inadequate to sustain basic financial needs of farming households. Two, no less than the PM of the country has assured that MSP will be available to farmers. The debate is about legalizing MSP. On the face of it, it appears little perplexing that the government showcases a policy that it feels shy of enforcing legally. MSP, which is the floor price at which foodgrain is procured from farmers by government, is like a lifeline to the nearly 900 million farm income dependent Indians. It was introduced in the sixties during the Green Revolution to encourage farmers to grow food crops. In the current regime the farmers are expected to sell their (23 covered) crops at government fixed MSP but actually don’t; the bulk of procurement is wheat and paddy.

The centre currently announces the MSPs of 23 crops, including for cereals, pulses, oil seeds, and four commercial crops. MSP technically ensures a minimum 50% return on all cultivation costs. It does not happen in practice. The prices, actually obtained by farmers, during harvest time are well below the officially declared MSPs, which cannot be demanded as a matter of right because these are not legally enforceable. According to a survey 62% farmers with upto 4 hectares of holding were not ever aware of MSP. Out of the rest even though aware, only a small fraction sold at MSP. There is a very clearcut negative relationship: Smaller is the landholding, less is the actual sale of the produce at MSP. Does it not mean that the farmers should be legally assured of minimum support to livelihood?

Proponents of free market price discovery abound in India, as elsewhere. But they overlook the unique nature of agricultural markets in India. They ignore the concept of distress selling. Free market pricing has pushed farmers in Western countries out of farming (food supply, starting from production, having been taken over by corporates). Due to low population pressure these farmers were easily absorbed in other sectors of the economy. But this is not possible in India with a huge population of farmers.

There are three ways the MSP can be implemented. But before coming to them, let’s see what the opponents of legally guaranteed MSP have to say. According to them, open ended procurement at the declared MSP would prove disastrous for India, including farmers themselves. It would distort cropping patterns, and would lead to wastage of scarce resources. It would also discriminate between farmers growing MSP supported crops and others, not growing these. There would be payment arrears, and therefore law suits.

According to believers in market, a functioning market facilitates exchange and determines equilibrium levels of demand and supply of the exchanged products. It ensures efficiency which spreads further due to price competition. There is an incentive to reduce cost (so as to become more competitive and enhance productivity through R&D). A system of fixed prices, according to these market advocates, would rule out such gains. Besides, we will fall out of WTO mandate of not subsidizing agriculture. Our agricultural exports will become uncompetitive. The list of such arguments against MSP is endless if MSP is legally mandated. But is it convincing? To be sure these are arguments against MSP, not against only legally mandated MSP. But the government has never said that MSP will be abolished; what is contentious is the legal backing to it. 

Coming back to the three different ways of ensuring MSP, first, private traders or processors can be forced to pay MSP, as in case of sugarcane. Here the mills are required to pay FRP (Fair and Remunerative Price). Second, the government itself procures at MSP, as in case of rice paddy, wheat, cotton, etc. But here the MSP implementation has been effective only for four crops, partly in some, and not at all in many. Infact, in livestock and horticultural produce there is no MSP even on paper. Thus, the 23 MSP crops together account for merely a third of agricultural output by value. Finally, MSP can be guaranteed via price deficiency payments whereby farmers are paid the difference between the MSP and the average market price for the particular crop during the harvestingseason. Anil Ghanwat, member of the SC appointed committee on farm laws, says he does not oppose MSP in principle but it should be used only if it serves a national objective.

According to one estimate by Harish Damodaran the MSP is already being enforced on nearly 4 lakh crore worth of produce. Providing legal guarantee for the entire marketable surplus of the 23 MSP crops would mean covering another Rs. 5 lakh crore, infact less. Remember, the government will earn revenue by selling which will offset some cost of procurement. Second, when the government buys sufficiently (but not completely) at MSP, the ‘market’ price would go up. Hence there need not be purchase upto 100% at MSP. According to a 2015 report only 6% of the farm households sell wheat and rice to the government at MSP rates.

Indeed the entire issue of legal guarantee for MSP is being misinterpreted. MSP should not mean that the government buys (open ended procurement) everything from everyone. Government needs to intervene in the markets in the event of a price fall. The farmers are entitled to fair pay, especially in the background of constitutional fundamental right of life and livelihood. If a law Legalizing MSP ensures this, so be it. In actual practice, however, if the government intervenes and purchases even a quarter of the total production, it will stabilize the markets. Besides, all crops won’t sell below MSP at all the time.

Even NitiAayog member Ramesh Chand, who favours market determined prices, says that if legal sanction to MSP ensures its actual payment to farmers, this would be the easiest way for any government to help farmers get desired prices. However, according to him, this can be done at the state level itself. Another way, as suggested above, could be to pay only the price differential between MSP and market price. Direct benefit transfer could also be considered. Then, the farmers can be allowed to trade warehouse receipts, instead of physical purchase by central agencies, which would have additional advantage of encouraging investment in warehouses. The idea should not be to actually pay the MSP but to ensure that MSP becomes the floor value of the produce.

There is infact need to widen the MSP-PDS (Public Distribution Scheme) together. MSP operations are sustainable only if the procured crops are distributed through PDS. It PDS entitlements are expanded, poverty will be significantly reduced. According to latest estimates of NitiAayog, 25% of India still suffers from poverty, as per multidimensional poverty index. There is conclusive evidence available that indicates that in kind food transfers from the PDS and midday meal schemes significantly, reduces poverty.

It is to be seen thus as to what wins, (market) efficiency or equity?

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