Stalled farm reforms could still be given another push

Payments to farmers for their produce could comprise two distinct parts: a market stabilization price and an income transfer. (Photo: Mint)
Payments to farmers for their produce could comprise two distinct parts: a market stabilization price and an income transfer. (Photo: Mint)

Summary

Cash transfers and a price stabilization fund could give farmers a safety net for a broad market shift

With Uttar Pradesh under the Bharatiya Janata Party’s belt, fans of Prime Minister Narendra Modi, among them reputed economists, sound exultant, imagining the coast is clear for a serious dose of economic reforms. This is something of a routine after every electoral win since the big one in 2014. The question they are asking this time is: Will the stalled reforms for India’s farm economy get another push?

An off-record chat with a Cabinet minister in the Prime Minister’s inner circle after the state poll results were declared suggests that the farm laws repealed by Parliament aren’t about to be revisited. This minister was categorical that the government’s stand—taken last November under pressure from farmers protesting the laws—remains unaffected by this year’s poll results. And so, unless state governments take on the task, agriculture reforms may languish on the to-do list.

The minister’s insistence that “political resistance" made the Centre give up is hard to grasp. That a government that privatized Air India and lost no political capital for biting that bullet can’t get its act together on other stalled reforms for fear of a political backlash is baffling. Unless it privatized Air India under duress, forced by its stressed exchequer, rather than out of conviction in reforms.

The Modi government can capitalize on an opportunity presented by geopolitical developments to tidy up India’s inefficient food procurement and subsidy system, and repair both the exchequer and its own record on reforms. Plus, it’s the only workable way to “double farmer incomes".

Technically, the minimum support price (MSP) is supposed to be a floor price below which the market price shouldn’t fall. But the MSP doesn’t behave like a floor-price system in India. Instead, it has become a market substitution price because, year after year, MSPs are set above market-clearing prices for political reasons. Farmers mistakenly believe that higher and higher MSPs are good for them, not realizing that the way this plays out is that it leaves them at the mercy of government procurement agencies, which are inefficient, ineffective, and often delay payments.

Why? Because market price signals do not get transmitted to farmers, and season after season, they overproduce wheat and rice, resulting in gluts and therefore depressed market prices. Export policies are too faulty to let excess supplies drain outwards, and governments in Delhi are only happy hiking MSPs to appear pro-farmer and sustain vote-bank politics. Since signals from the market to farmers on what and how much to produce are obliterated, the loop repeats endlessly, increasing the subsidy burden on taxpayers and offering farmers no incentive to diversify into crops in demand that the market would reward with better prices. Mountains of subsidized foodgrain procured this way either rot or are devoured by rats. The soil, environment, water and diets get no healthier.

One way farmers could get remunerative prices for their produce—and in a timely manner—would be if the procurement agencies are made to operate a price stabilization fund that can aid market price discovery while providing a backstop if prices fall below distress levels. These levels need to be computed by them independently, at best under the oversight of an independent body like the Commission for Agriculture Costs and Pricing (CACP), but in no way by the fiat of the political executive. If politicians are eager to help famers, which they should be in a democracy, they should do so through income support. Transfer mechanisms for this are now in place and are considered more or less efficient.

Separately, the consumer should be given the choice of receiving a cash transfer in lieu of the Public Distribution System (PDS) foodgrain. This will put an end to the monetization of unwanted PDS foodgrain by beneficiaries, which is rampant throughout India. Beneficiaries are receiving low-grade foodgrain they never asked for that they then sell off, sometimes even as cattle-feed. Doing this will also give the Centre an idea of India’s actual food requirements.

Payments to farmers for their produce could comprise two distinct parts: a market stabilization price and an income transfer. The former should not be more than the average price in the previous year (prices fluctuate across the calendar, dropping as a harvest arrives and rising later). The stabilization price shouldn’t need Cabinet approval either, which would free it from political considerations. It should be determined by the procurement agency with CACP approval. The CACP could be elevated to the level of a statutory authority in which economists set prices, scientists settle matters related to science and bureaucrats oversee issues pertaining to administration, thus eliminating both politics and political discretion and allowing markets to operate the way they should. The body’s members should strictly be appointed on the basis of domain expertise.

The second component, of an income transfer to farmers, should subsume all farm subsidies like water, power, seed, fertilizer etc, and also government schemes like PM-Kisan, Rythu Bandu, Kalia, etc. The level of income transfers could be adjusted to any level that politicians desire, say a reasonable mark-up on the cost of production for wheat in the rabi season and paddy in the kharif season, leaving entrepreneurial farmers to seek returns by crop diversification over and above this benchmark level.

These reforms could ensure farmers get the income support they deserve without disrupting the market signals necessary to sustain a healthy agricultural economy.

Puja Mehra is the author of ‘The Lost Decade (2008-2018)’

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