Higher MSPs do not truly benefit farmers
The lack of state infrastructure as well as fiscal constraints mean that farmers remain mute spectators to the political games played in their name
In the last two years, fixing the minimum support price (MSP) to deliver remunerative prices to farmers has been at the forefront of the debate on the farm crisis. There have been numerous reports about the crash in market prices in this period, particularly after demonetization in November 2016. The Union finance minister finally announced in the budget speech for 2018-19 that the government will fix MSP at 50% over the cost. On 4 July, the government fulfilled its promise.
It has become clear now that it has not considered imputed rental value of land and interest on own capital invested by the farmer in calculating farmer cost (C2). The MSPs announced for kharif 2018 provide a return of 50% over paid out cost of inputs, interest on borrowed capital and family labour (A2+FL). Moreover, while declaring the MSP, the government has not considered other relevant factors, such as domestic demand, global prices, export competitiveness and ecological sustainability of crops such as paddy. The relevance of an expert body like the Commission for Agricultural Costs and Prices (CACP) is also in question as the MSPs have been fixed through a static formula. In the long run, it is not a desirable policy option.
When the Modi government was formed in 2014, the country was reeling under high food inflation. In the first four years of its term, MSPs saw only moderate increases, except in the case of pulses whose MSPs were raised substantially to boost production. A lower hike in MSP was also seen as a tool of fiscal consolidation.
Announcements of higher MSPs in the past have not always resulted in increases in farmer incomes as procurement was restricted to wheat, paddy and cotton—and that too only in a few states. Sugar was the only other commodity that was assured of purchase at the fair and remunerative price declared by the government, as sugar mills are mandated by law to pay that price. In the entire north-east and many eastern states such as Bihar, Jharkhand and West Bengal, the procurement infrastructure is very weak. In these states, as of now, farmers have no hope of receiving higher MSP for kharif crops.
It is not that past governments have not tried to provide MSP to farmers. There are at least five Central government schemes, discussed below, to provide MSP support to farmers. But they have met with only limited success.
First, procurement of wheat and paddy for meeting the requirement of the public distribution system (PDS) is undertaken largely by state governments. Of the total procurement of wheat and paddy from farmers, the Food Corporation of India’s (FCI’s) share is less than 10%. In the north-east and many other states, procurement operations are almost non-existent and farmers are forced to sell below MSP.
The second scheme is the price support scheme (PSS) under which Central agencies like Nafed can procure notified commodities for which MSPs are declared, including oilseed, pulses and copra. The government has provided a guarantee of ₹29,000 crore to Nafed for procurement. The losses incurred are reimbursed by the Union ministry of agriculture. However, it took Nafed more than five years to get payment of about ₹1,000 crore spent in the procurement of copra, groundnut, cotton and pulses.
The third scheme is through the price stabilization fund (PSF), operated by the department of consumer affairs (Doca) under which interest-free working capital is provided to the procuring agency. Under this scheme, Nafed, FCI and the Small Farmers’ Agribusiness Consortium have procured about 20 lakh tonnes of pulses for buffer stock. The entire losses incurred under the scheme will be borne by Doca.
The fourth scheme is for procurement of kapas at MSP, which is largely operated by the Cotton Corporation of India (CCI), whose losses are fully reimbursed by the Union ministry of textiles. In Maharashtra, the state government has been procuring cotton under a monopoly cotton procurement scheme. The losses in this case are borne by the state government.
The fifth scheme is for perishable commodities. This is called market intervention scheme (MIS) under which specific proposals of state governments are considered by the department of agriculture on a case-to-case basis and the Centre bears up to 50% loss incurred in operations. But the proposals can be approved only if there is 10% increase in production or 10% fall in rates over a normal year in a state. The reimbursement of losses is limited to 25% of value of procurement, including overheads. Several states have sporadically used the scheme—but due to its restrictive provisions, most have not been very keen.
As the experiences of these schemes show, the benefit of higher MSPs for kharif crops is unlikely to be available to most farmers as the states lack adequate storage capacity, working capital and manpower for undertaking large-scale procurement of all commodities. When kharif crops are harvested in October-November, market prices are likely to be below MSP for most of them. Since the MSP of kapas and paddy will make cotton and rice costlier than international prices, we can expect large-scale procurement of kapas and rice. Jowar and bajra farmers are unlikely to realize any benefit as there is little demand for them in the open market and procurement by states is doubtful. Even in the case of maize, farmers may have to sell below MSP as procurement has been discontinued after 2013-14 and market prices have been lower almost every year.
Large-scale procurement is also not desirable as huge losses will be incurred. As NITI Aayog has been given the mandate of suggesting alternatives, we may see the launch of a national scheme of price deficiency payment. One hopes the NITI Aayog will take into account that, most of the time, procurement is a loss-making exercise. So why not transfer the money directly to farmers’ accounts as Telengana is doing through direct investment support?
Unless the farmer receives the higher MSPs announced by the government, he remains only a mute spectator of the games played in his name in an election year.
Siraj Hussain is former secretary, agriculture, and visiting senior fellow, ICRIER.
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