Dr Sunil Bhardwaj
Farmers are the backbone of our nation and they sincerely deserve our gratefulness for their selfless hard work for providing us food necessary for our very survival especially during starvation years. The memories of major famine of Bengal (1943) and Bihar (1966-67) send shivers down our spines. It was the time when there was acute food shortage and people were dying of hunger in the country. India had to depend on American grain aid popularly known as PL-480 program and the condition was called Ship-to-Mouth because the people would get grains only when ships reached the ports of Bombay. The private players were limited and the Government direly required food grains to feed the starving population through public distribution system (PDS) that forced the government to jump into the arena. Faced with the compelling situations, the Government then initiated green revolution to combat food scarcity in the country. In this backdrop, the minimum support price (MSP) was created to incentivise farmers to increase the production of specific crops, particularly wheat and rice by using advanced agro-techniques.
Initially, MSP was started as a safety provision for the farmers, if their crop remained unsold in the open market. The basic idea of MSP was to providing farmers with minimum base price to safeguard their minimum profit for the harvest and to protect them from the sudden fall in the price of agriculture crops in case of bumper production. The procurement price (buffer stock or PDS) was always kept below market price and higher than MSP. In the event of high crop production, the farmer’s first preference was to sell at the market price and then to the government at a procurement price. Any unsold crop was then to be sold to the government at MSP in the end. As a result of these efforts the country was able to double the production of wheat and rice by 1971-72 sufficient to feed country’s population. The major share of this production came from Punjab, Haryana and western UP due to fertile land and availability of irrigation facilities etc.
How efficient is MSP, today?
Commission for Agriculture Cost & Prices (CACP) under the Ministry of Agriculture recommend MSPs for 23 crops (14 Kharif, 5 Rabi and 4 commercial) to the Cabinet Committee on Economic Affairs which take final decision. The Commission analyse the state wise, crop specific production cost estimates provide by the Directorate of Economic and Statistics in Ministry of Agriculture with a time lag of three years means no real time cost estimates. Although, MSP is announced for 23 crops, procurement happens for 3-4 crops only predominantly rice and wheat which is also less than 40% of their total production. Over the years MSP has made Indian farmers complacent with the huge production of rice and wheat making it a Wheat-Rice Economy. As per national accounts data, only 5.6% to 6% farmers get benefitted from MSP annually wherein a huge regional disparity has been noticed in the procurement of crops across the country as well. It is astonishing to note that Punjab and Haryana produce only 14% of rice but 38% of total procurement of rice was done from these two states on minimum support price (MSP) in 2019-20. Similarly, 80% of total wheat procurement of the country was done from Punjab, Haryana and Madhya Pradesh by Food Corporation of India (FCI) in the same year. Eventually, the economies of these states are built around minimum support price (MSP) where farmers as well as Government get benefited. It is worthwhile to mention here that FCI has paid more than Rs 11,300 crore to Punjab and Haryana as levies for lifting rice and wheat in respective seasons of 2020-21 and 2021-22. Moreover, rampant corruption in Food Corporation of India (FCI) and APMC Mandis render procurement and Public Distribution System (PDS) inefficient and ineffective on ground. There are corrupt officials and people behind the curtains whose hefty incentives and benefits get disturbed if we talk of reforming or remodelling the current system.
MSP as a Statutory Provision
As per Food Corporation of India (FCI), annual food grains required for National Food Security Act (NFSA) and other welfare schemes is 214 lakh tonnes but FCI has 512.9 lakh tonnes as on January 1, 2021 and most of grain stock is rotting under open sky due to lack of storage facilities. This limits the government’s capacity to purchase more grain from the farmers. FCI is a non-profit organisation and government has to compensate the difference between procurement price and sales price but in the past few years Government is unable to compensate it fully raising its total debt to about Rs 3,81,000 crore. In such a sorry state of affairs, let’s suppose if all the 23 crops have to be 100% procured at MSP, the government has to spend approx. Rs 17 lakh crore and to our surprise that is half of the total expenditure proposed by the government in the union budget of 2020-21 (Rs 30 lakh crore). This calculation is based on A2+FL*50% formula. The figures can be even higher if MSP is calculated by M. S Swaminathan’s formula i.e C2*50% that include rental and interest foregone which the farmers wants in MSP calculation if it gets a statutory backing. Every one percentage point increase in MSPs leads to a 15-basis point increase in inflation which could disturb the Reserve Bank of India’s inflation targets stimulating money squeezing policy hurting country’s economic growth. Some opined that government need not to procure the crops but must make MSP a statutory provision so that crops cannot be sold less than MSP even in the open market. This notion is absurd and impractical because MSP is a market intervention which incentivises farmers to produce grains over other crops having high market demand, giving rise to imbalance use of recourses, shifting cropping pattern and discrimination with other farmers. This will increase the supply of grains in the market causing its price to fall even below minimum support price (MSP). Besides MSP, government is also giving subsidies to the farmers on seeds, fertilizers, electricity which is considered actionable by World Trade Organisation (WTO), hampering country’s export prospects. There is no argument that farmers do not need support, but policies that are less distortionary are in the interest of both farmers and consumers.
Issue of Contention
It is very heartless to talk against farmers and against MSP in India because farmers are always right. And why not? It’s a fact that approx. 86% of our farmers are small and marginal and MSP gives them a sense of security to maintain the status quo. But, they must not be blamed for their plight because successive governments have not made required efforts to change the conditions of farmers in the country. Their policies remain ingrained to the old economics of MSP even when the market conditions have changed dramatically. Today, agriculture sector contributes about 15% to country’s GDP and employee about 55% of country’s population in comparison to 1960’s where it contributed 55% to country’s GDP and employee 70% of country’s population. This means that either the productivity of agriculture sector has gone down over the years or it has not been reformed at the required pace. Although, contribution of agriculture sector to economic GDP is only 15% but its contribution to political GDP is four times higher making it a fertile ground for inevitable election agenda every time as is happening now due to elections in five states in the beginning of 2022. It’s a known fact that, the state support is inevitable in agriculture sector, there is nothing bad about it; almost all the countries across the globe are supporting their farmers in one way or the other.
But procuring all the crops produced within the country and distributing it to countrymen at highly subsidised rates is an inefficient system and a bad-economics. Indeed, many economists do not support the idea of procurement of agriculture produce by the government as it leads to huge fiscal expenditure on procurement, transportation, storage and distribution etc. Rather, economists believe that market-driven models can be more sustainable in the long run. However, there is a critical issue that muddle my mind is related to the number of beneficiaries of Targeted Public Distribution System covered under National Food Security Act, 2013. As per NFS Act, 81.85 crore people i.e. 66% of India’s population that include 75% of rural and 60% of people as per census 2011 are given food grains at subsidised central issue price (CIP) of Rs 3/kg for rice, Rs 2/kg for wheat and ? 1/kg for coarse grains through TPDS. But very recently, National MPI-2021 index developed by NITI Aayog which assess the poverty on three crucial parameters – health, education and standard of living – on 12 indicators such as nutrition, years of schooling, access to cooking fuel, sanitation, drinking water, electricity, etc reported that only 21% of Indian are poor. Surprisingly, neither the number of beneficiaries under NFSA, 2013 and nor the central issue price (CIP) which is supposed to be revised after every three years, has never been revised. In this topsy-turvy situation of poverty numbers government is running the show by providing grains to 66% of countrymen without out any rational except Covid-19 pandemic. According to NITI Aayog, if eligible population under NFSA, 2013 is decreased from 75% to 60% in rural area and from 50% to 40% in urban areas the government can save Rs 47,229 crore on subsidies.
Way Forward
In India poverty is a critical political issue rather than an economic phenomenon and political parties vow to fight poverty to win over poor voters during election seasons where their policies on ground are not very effective. After the independence, the Indian government initiated many welfare schemes but a record decline in poverty begins when Indian economy started growing rapidly fuelled by reforms in 1990’s. The crux of the problem is that, the farmers require price for their crops and poor require a handholding for pulling them out of hunger, malnutrition and poverty. Can this be done by present economic model? Answer is a big No. It will simply delay and worsen the problem and even in 2050 we would be discussing the same issue. Estimating exact number of the poor in the country is of foremost importance. The policies and programmes must be time bound, performance oriented designed to bring people out of poverty and not to make them dependent on government aid making them unproductive.
Distribution of free laptops, mobile phones and scooters during elections by political parties will never eradicate poverty and amounts to misuse of tax payers money. We must understand that, India produce surplus grains today and the policy instruments to deal with scarcity and surplus economic situations are different. In surplus conditions greater role of demand driven market forces are advocated instead of old economics of MSP valid during scarcity periods. Indian agriculture sector require huge investments, regress planning, on ground execution and above all reformist attitude on the part of government. This will require converging efforts of all the stakeholders, research institutions, agriculture universities, farmers’ organisations, traders and other market participant to overhaul the farm sector and production of crops as per the region specific advantages and market demand. Farm Bills 2020 was one good attempt that tries to increase the role of market forces and would suit the farmers as well as the consumers. But, an abrupt shift from a MSP system to a market driven mechanism can be disastrous to the small and marginal farmers. Hence, a very balanced systematic approach is advised. We must keep in mind ‘what is market friendly may not necessarily be farmer unfriendly’. The small and marginal farmers can be provided direct income support in their accounts which can be refined and scaled-up from present Rs 6000 annually under PM-KISAN. Instead of providing MSP, the main focus of the government must be to develop efficient value chains and to channelize private investments in infrastructure for the production, storage, transportation, agri-processing and for selling of farm produce by the farmers in the markets of their choice. Indian agriculture sector imperatively require reforms making it future ready that can articulate the level of demand-supply and price signals for a particular crop.
(The author is a Faculty of Business Studies, University of Jammu.)
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