Rich farmers will gain the most from MSP hikes

It is very likely that only lip service will be paid to the MSP hikes and it will be business as usual. Photo: HT

The common narrative about the government’s hike in minimum support prices (MSPs) for farm produce is that farmers will benefit. But the question is: which farmers? We have small farmers, marginal farmers, peasants and kulaks and landlords. Farmers in Punjab and Haryana are different from their brethren in Bihar and West Bengal or the north-east. There are farmers who plant paddy, those who cultivate coarse grains and those who cultivate cotton or sugarcane. Which farmers gain the most?

A National Sample Survey Office (NSSO) report that mapped the income, expenditure and indebtedness of agricultural households in India in 2013 provides some clues. For households owning farms of less than 0.4 hectares, who are a third of all agricultural households, net receipts from cultivation account for less than a sixth of income. They will certainly not benefit from higher MSPs.

For those holding between 0.4 and 1 hectare, net receipts from cultivation are around two-fifths of their earnings. This class constitutes another third of all farming households. They too won’t gain much.

Taken together, farmers owning up to 1 hectare of land constitute 69.4% of total agricultural households. The report finds their monthly consumption expenditure is higher than their earnings from all sources, which means they are chronically in debt. Many rely on moneylenders, rich farmers and landlords to advance them the money needed for cultivation and they are often forced to sell their produce to these financiers at lower than market prices. In short, almost 70% of farming households are unlikely to be beneficiaries of the MSP hike.

Also read: Higher MSPs do not truly benefit farmers

On the other hand, those having more than 4 hectares of land, a mere 4.1% of the farming population, get more than three quarters of their net income from cultivation. It is the rural rich, rural India’s ruling class, who pay no income taxes, who gain the maximum benefit from farm loan waivers, who will reap the bonanza from higher MSPs.

The revelations of the Shanta Kumar Committee report underscored that fact. It found that a mere 5.8% of agricultural households in India had sold paddy or wheat to any procurement agency. Even these households sold only a part of their total sales, ranging from 14-35% for different crops, at MSP. Said the report, “The upshot of this entire evidence is that the direct benefits of procurement operations in wheat and rice, with which FCI (Food Corporation of India) is primarily entrusted, goes to a minuscule of agricultural households in the country. Obviously then, much of the procurement that government agencies undertake comes from larger farmers, and in a few selected states (Punjab, Haryana, Andhra Pradesh and lately from Madhya Pradesh and Chhattisgarh).”

Also read: Implications of a steep hike in cotton MSP

Who are the losers from the government’s move? Economists’ estimates of the impact on inflation as a result of higher MSPs vary, but all agree that inflation will go up significantly, particularly if the government steps up its procurement. An IMF working paper by Sajjid Chinoy, Pankaj Kumar and Prachi Mishra titled What is responsible for India’s sharp disinflation? said the disinflation in 2014-16 owed much to the government’s rationalization of MSPs. If that is correct, conversely, the sharp rise in MSPs now will fuel inflation.

Who loses the most from high inflation? The urban poor will be badly affected, of course, but also agricultural labourers, the most vulnerable class. Agricultural labourers now outnumber cultivators. Further, the marginal farmers may also not produce enough food for their requirements and have to buy from the market. Is benefiting the rural rich at the expense of the masses really good politics? And that’s not even counting the price the economy will have to pay due to higher interest rates, uncompetitive agricultural prices, a bloated fiscal deficit and skewed incentives. That is why it is very likely that only lip service will be paid to the MSP hikes and it will be business as usual.

If the objective is alleviation of rural distress, the Telangana government’s programme of income transfers looks far more promising. But in the long run, there is no alternative to creating enough jobs outside agriculture to absorb the disguised unemployment in farming.