Opinion
Fixing the MSP mess, through futures and options
Summary
There’s no clear way out of our farm sector bind without using market tools like futures and optionsAyear-long agitation by Indian farmers resulted in the three farm laws enacted last year being repealed. All the three laws supposedly enlarged the freedoms of farmers. The first one gave them the option of selling farm produce outside the Agricultural Produce Marketing Committee-run mandi system. The second law promised freedom from arbitrary stocking (and hoarding) limits, while the third law allowed farmers to contract directly with corporate buyers if they so wished. In each case, their choice was enhanced, not reduced. Farmers were and are free to go with their old ways. Why then was there such a determined and ultimately successful opposition to these reformist laws, which merely intended to enhance freedoms? We do not have the space here to go into all the details of the farmer agitation’s political economy, nor to debate the fidelity of the lawmaking process to constitutional principles. Was it necessary to introduce far-reaching reforms through an ordinance, that too in the midst of a pandemic? Do reforms not work better if preceded by parliamentary discussion? Suffice to say that despite the freedom enhancing nature of the three farm laws, farmers were uneasy about what they did not say.
Take, for instance, the first law. If there were greater freedom to sell outside the mandi system, would that have meant the eventual whittling down of mandis? It is at mandis where established practice gives farmers their assured minimum procurement prices, and some protection from cheating on weights and measures. Never mind that these mandis work well only in some states, and that middlemen have disproportionate clout. But the mandis is where the minimum support price (MSP) regime works. The law is silent on the MSP system, but the suspicion was that support prices would eventually be dismantled, not least because of its fiscal burden. Such was the force of the suspicion and growing distrust that despite assurances from the Prime Minister himself, and from several of his cabinet colleagues, farm agitators now demand full legal status for the MSP system. Remember that prior to the introduction of the three laws, this demand was nowhere on the horizon. Emboldened by their defeat of the three laws, farmers will have no less than a constitutional guarantee for MSPs.
The question that arises then is this: How can such a legal minimum price for 22 crops, and maybe more, be enforced? This calls for government intervention on a massive countrywide scale. This can be done either through a giant government procurement programme or through private trade. The former will require a very large budget, even larger warehouse capacity, and an unimaginable level of expertise in execution, enforcement and micromanagement.
A proposed private member’s bill by member of Parliament Varun Gandhi, which he claims is an “actionable piece of legislation", says: “Any farmer who is not paid the guaranteed MSP by the trader for the sale of their agricultural commodities shall be entitled to a compensation [amounting to] a value equal to the difference between the guaranteed minimum support price and the price obtained by the farmer within seven days of the matter being brought to notice by the aggrieved party." Imagine the involvement of various parties like auditors, magistrates, police officers and the infamous “competent authority" in making this work. To reduce the burden of procurement and storage, and use direct benefit transfers instead, a price deficiency compensation scheme has been proposed. This has been tried in some states like Madhya Pradesh without much success. In terms of monitoring, verification and information requirements of the government, it is nothing short of Soviet-style planning.
If it is not the government buying agricultural produce, can we impose the MSP requirement on private trade? This could also reduce the fiscal burden. Maharashtra tried this in 2018 when it asked traders to buy pulses at the MSP from farmers. Traders simply boycotted the move despite threats of imprisonment. How do you force traders to buy when they don’t want to? Enforcing price ceilings and floors against the law of demand and supply is doomed to fail. Hence, the government has to find a way to use the market mechanism to achieve its desired goal.
The MSP system is an insurance mechanism and the MSP is like an option price. It becomes operative only when “an event occurs", such as when the market price drops steeply. This is how insurance markets—futures and options, that is—work. Instead of implementing price floors through large procurement programmes, it is time to use futures markets at least on a pilot basis. If operationalized for all 22 crops, it will lead to the much-desired crop diversification. The current MSP regime only works for wheat and rice, and is concentrated only in a few states.
A scheme that harnesses the market mechanism and is implemented in all states, administered locally, can provide incentives for other crops. Even coarse cereals should be added to this list.
The government procurement scheme, especially for wheat and rice, is aimed at providing food security, as envisaged under the National Food Security Act. But the proposed MSP scheme discussed above is designed to enhance the income security of farmers. This will work only through the market mechanism.
Ajit Ranade is a senior fellow, Takshashila Institution
