3 min read.Updated: 11 Feb 2021, 09:34 PM ISTHimanshu
The system won’t help them unless we relieve our support-price agenda of political considerations
The Prime Minister’s assurance of the MSP system staying firmly in place means little to farmers if it doesn’t act as a reliable safety net against market prices dropping grievously low
Replying to the motion of thanks on the President’s speech, Prime Minister Narendra Modi made a categorical statement that the minimum support price (MSP) was there, is there and will remain. This was in response to the demand by farmer unions regarding the enactment of a law to guarantee MSP-based procurement as part of their agitation against three farm Acts passed in September. The Prime Minister’s statement is not new, having been reiterated by several ministers during and after negotiations.
While it reiterated the government’s earlier position, articulated this time by its highest authority, it did little to break the stalemate between farmer unions and the government. This is primarily because the issue was never the existence of minimum support prices (MSPs). As the Prime Minister correctly stated, it has always been an instrument of intervention in crop markets and will continue to be so. The issue, however, is whether the MSP system in its current form has played the role that it was designed for. By definition, an MSP is an offer price at which the government is willing to buy any amount of grain from farmers. This is useful in years of high production, when market prices are likely to fall in the absence of a support operations. The use of MSPs and support operations is not unique to India. It is used by most countries in some form or another, including by most developed countries. It is a universal instrument to provide farmers price security, given the large fluctuations in output due to weather vagaries and inelastic demand for most agricultural commodities. Any MSP so determined should be above the hypothetical market price, which may or may not have any explicit reference to input costs. Of course, it involves an element of subsidy, which the government absorbs.
MSP operations by design are meant to support a variety of crops, at least those grown by a majority of farmers, and should be undertaken until market prices stabilize. These should also be utilized across the country, depending on the need for such support, based on prevailing prices. Support prices are therefore different, analytically as well as functionally, from procurement prices, which are the rates at which the Food Corporation of India (FCI) buys foodgrain for India’s public distribution system (PDS). Unfortunately, political considerations over the years have reduced MSPs to FCI’s procurement prices. Since the government only distributes rice and wheat through the PDS, most procurement is of these two crops. This defeats the purpose of the MSP system, under which prices are announced for 23 major crops. Even for these crops, MSP operations are not based on prevailing market prices or even PDS requirements. For the last two years, the government has procured way more than what is needed to run the PDS. As a result, foodgrain stocks have far exceeded our buffer norms. As on 1 January 2021, as against the norm of 21.4 million tonnes of rice and wheat, stocks were almost four times, at 79.6 million tonnes. Some of these stocks were acquired in 2019 and 2020, when the country was witnessing food inflation of more than 10% annually and the retail prices of cereals were at or above their MSPs. On the other hand, for several crops such as maize, even though prices collapsed, there were hardly any MSP operations. Even for rice and wheat, MSP operations were undertaken in states that had market and storage facilities, rather than on the basis of prevailing prices. As a result, though wheat prices collapsed in Bihar, its farmers hardly got any MSP support, compared to Madhya Pradesh, where 13 million tonnes of wheat was procured despite higher farm-gate prices.
India’s current price policy, driven by political expediency, is not consistent with the idea of an MSP as a support price to be invoked only in the event of a price fall. Moreover, it is also a waste of precious fiscal resources. It is unfair to blame farmers in Punjab for growing too much rice and wheat when they have a policy incentive to do so. A broad-based MSP regime catering to all major crops would not only be fiscally prudent, but also incentivize crop diversification based on agro-climatic conditions. Further, extending MSPs to pulses and millets would help reduce dependence on imports and encourage better agricultural practices that would benefit farmers in some of the poorest rain-fed regions. Contrary to the Prime Minister’s statement, the reality is that there was never an MSP policy. It does not exist now, and never will, as long as political considerations dominate the Centre’s price-intervention strategy.
Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi