Why MSP alone does not bring farmers prosperity

Minimum support prices are meant to function as a safety net, complemented by a functional crop insurance scheme. (AFP)
Minimum support prices are meant to function as a safety net, complemented by a functional crop insurance scheme. (AFP)


Opposition parties and farmer lobbies protest that the increase in support prices is a sham, and wholly inadequate

The government has announced minimum support prices, MSPs, for 14 summer crops, chief among which is rice. While the average increase is 6%, the increase for rice is the lowest, at 5.1%. This is lower than the increase in cost: fertilizer and energy prices have gone up sharply in the wake of the Ukraine war, wholesale price inflation is in the region of 15% and consumer price inflation is about half of that. Opposition parties and farmer lobbies protest that the increase in support prices is a sham, and wholly inadequate.

It is possible to see the increase in support prices below the increase in costs as reform by stealth, provided the market mechanisms that would permit farmers to negotiate a guarantee-free regime on their own. However, these, such as a functional futures and options markets in farm produce — these stand banned — unconstrained access to global prices via export (capricious bans that serve more to signal political resolve to stamp out inflation to the general public than to boost farmer incomes) and facilities for food processing or swift evacuation of fresh produce to the retail buyer, are absent. The net result is a foregone opportunity to wean Indian farming off the infant formula of extended state support and let the market prove its mettle as the farmers’ friend.

Minimum support prices are meant to function as a safety net, complemented by a functional crop insurance scheme. Instead, the populist policy has, over the years, converted MSP into the means of farmer prosperity, wherever there is the follow-up of actual procurement, which is scarce for commodities other than wheat, rice, cotton and, after a fashion, sugar. This needs to change.

Farmers receive generous support from governments around the world. It would be futile to pretend that India can treat farmers like producers in other sectors of the economy, who figure out what is in demand, what is their own area of competence, what is the state of the art in any line of production and whether they could thrive in it or not. Farmers need and should receive some support, but that does not mean that the rigours of the market would not help them improve their earnings.

A basic reform that is required is to remove systemic pressure to keep the terms of trade between industry and agriculture adverse for the latter. When industry gets protection, raising the price of industrial goods above what they would be in the absence of protection, and the export of farm produce is restricted, depressing farm prices below what they would be, state policy turns the terms of trade in favour of industry and against agriculture: farmers need to exchange more bags of grain to buy the fertilizer or tractor they need than would have been the case in the absence of policy that boosted industrial prices and repressed farm prices.

Farmers gain from information on what crops face rising demand and what crops face declining demand. This information is carried in the prices of future contracts. In India, some atavistic fear of markets force politicians to ban forward markets in farm produce at the slightest hint of rising inflation.

Markets function only when they can be accessed. The telecom revolution means that a farmer in a remote Bihar village knows that the price of green chilly in a market 50 km from his village is double that available from the local trader. But if there are no all-weather motorable roads to reach that market, the only gain from that knowledge would be an ulcer in the making.

Produce that goes bad needs to be stored. Some things, like grain, can be stored, provided it is free of moisture, in silos without temperature control. Other produce, like onions or potatoes, call for climate-controlled storage. That calls for a reliable power supply. Or refrigerated trucks to carry off the produce along a motorable road.

The government does not invest in building the pre-requisites of a functional market that would help farmers, because it is politically more attractive to give away subsidies to farmers: fertilizer subsidy, free canal water, if the canal has not silted up or broken its embankments from prolonged neglect, free power to pump out groundwater.

And the most visible token of political support for the farmer is the MSP. In the case of foodgrains, the government has trained farmers in certain parts of the country to grow only the crops for which the government renders guaranteed procurement, at ever-increasing support prices. So, India ends up with 2.5 times the grain it needs and not enough of edible oil or oilseeds.

Farmers could probably earn far more from growing fruit or flowers, but the attraction of guaranteed returns from grain keeps them hooked to grain, grown on the strength of subsidized water pumped out of the ground using unmetered power, excessive quantities of subsidized fertilizer and assured procurement by the government at MSP that offers a surplus over all costs.

This regime must go. But the market pre-requisites must be created first, the futures and options market for farm produce must function, the international trade regime must be stable, the terms of trade must not be skewed against agriculture and the government must have an open dialogue with society at large on what is truly in the interest of the farmer.

Till then, MSP increases must serve as a token of the incapacity of the political system to muster the courage to do what is right, rather than what is expedient.


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