Yes, there exists an economic case for a regime of MSPs backed by law

Much of the anger of farmers and the genesis of the MSP demand can be traced to the inefficiency of the farm sector, which needs urgent reforms. (AP)
Much of the anger of farmers and the genesis of the MSP demand can be traced to the inefficiency of the farm sector, which needs urgent reforms. (AP)

Summary

  • It must not be viewed merely as a subsidy to farmers but also as a tool to aid in price management. A well-designed MSP system can provide income support to farmers and also serve as a complementary tool to control food inflation.

Multiple rounds of talks have failed to resolve the deadlock between agitating farmers and India’s government. The sticking point remains a legal guarantee for minimum support prices (MSPs). While this is a long-standing demand, successive governments have dithered on giving legal cover to the decades-old MSP system. If governments had implemented the system as designed and understood, legal cover would not be necessary. It only seeks to force the government to implement something that on paper has been in existence for more than five decades. Among many reasons cited by critics to reject the idea of legal backing for MSPs, the primary one is the anticipated economic cost of this exercise.

Much of this fear is imaginary, with no factual basis. Some research work, such as a study by Crisil, actually suggest the real cost to be minimal based on available data on prices and the MSPs of respective crops. While exact cost estimates are hard to arrive at, as they are likely to vary depending on production and demand, there is a case to examine the MSP system beyond the lens of its fiscal math. The system should not be viewed as only an income support programme, but an instrument of macro-economic policy. That is how it was designed, and if properly implemented, its benefits would outweigh the costs.

Much of the anger of farmers and the genesis of the MSP demand can be traced to the inefficiency of the farm sector, which needs urgent reforms. It is heavily concentrated in terms of its regional expanse, with intervention in a few surplus states and that too mostly in rice and wheat. A reformed MSP system that meaningfully applies across all 23 crops with MSPs would expand coverage across states and farmers. Most millets, pulses and oilseeds are grown by modest-level farmers in rain-fed and dry regions of the country, as they require less capital and inputs. Remunerative prices for farm produce in India’s agriculturally backward states would be good from an equity perspective and also necessary to boost incomes and thus demand for non-farm goods in the economy. At a time of rural distress amid declining cultivation incomes and wages, this will help revive the rural as well as the broader economy.

But the primary goal of an MSP regime is to ensure price stability for producers and consumers. Twice in the last two decades, inflation has been driven by food prices—once from 2008 to 2012 and more recently after the pandemic. In both instances, proactive monetary measures by the central bank were only partly effective, given the structural nature of food inflation. Contrary to claims made in support of India’s three abandoned farm laws, recent times have seen an over-reliance on stock limits, invocation of the Essential Commodities Act, export bans and the use of imports to augment supply. Most of these moves were not just distortive, but also ad hoc and erratic.

It is here that an MSP scheme can be helpful. An intervention when market prices are lower than MSP will allow the government to provide price support to farmers, but the farm produce procured can also be used to step up supply when prices are higher than MSP. In the long run, a well-designed MSP system is likely to serve as a complementary inflation management tool, along with monetary policy instruments. It will require the government to invest in creating marketing, storage and transportation structures, which are anyway necessary expenditures for higher value addition in agriculture. As investment in the sector has been growing at the slowest in 10 years, this is an opportunity to boost it.

Finally, a broad-based MSP system will also be crucial in fighting climate change and encouraging better natural resource management. With MSPs only available effectively for rice and wheat, it has led to a decline in the water table, and in turn rising input and energy costs. Covering edible oils, pulses and millets could encourage farmers to diversify crops and manage weather risks better. It will also save foreign exchange, given the economy’s large dependence on imports of edible oils and pulses. It will also help insulate the economy from international price transmissions in agricultural crops.

A well-designed MSP system with expanded crop and regional coverage is not just a necessity in the current circumstances, given India’s rural distress, it will also aid macroeconomic management and economic growth. Evaluating the system as a subsidy to farmers misses its important role in ensuring an effective price policy in an increasingly vulnerable sector ridden with weather and price uncertainties.

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