Demand for legally guaranteed MSP could put fiscal strain, experts warn

In a key concession to protesting farm unions, the Union government has proposed to set up a committee “mandated” to ensure Indian farmers get MSP for their produce
Farmers dismantle their tents after SKM leaders announced to call off the agitation, at Singhu Border, in New Delhi on Thursday. (Sanchit Khanna/ Hindustan Times)
Farmers dismantle their tents after SKM leaders announced to call off the agitation, at Singhu Border, in New Delhi on Thursday. (Sanchit Khanna/ Hindustan Times)
Updated on Dec 10, 2021 12:27 AM IST
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By, Hindustan Times, New Delhi

Ensuring minimum support prices (MSPs) for a slew of agricultural commodities produced over two seasons a year, a key demand of farmers, will require higher government subsidies, which could have implications for the fiscal deficit and ramifications at the World Trade Organisation, analysts said.

In a key concession to protesting farm unions, the Union government has proposed to set up a committee “mandated” to ensure Indian farmers get MSP for their produce. Farmers have demanded a legislation to make support prices a legal right.

MSP is a federally fixed floor rate for farm produce to avoid distress sale. Since the government buys sufficiently large quantities of cereals at declared MSPs, these are not always available for commodities such as oilseeds, corn or pulses.

Distress selling of farm produce and price volatility in non-cereals have been a major gripe among cultivators.

If the government was to bring a law to guarantee MSP, which is unlikely, analysts said, state-owned agencies may end up procuring large quantities of farm produce so that the market price settles at MSP levels.

“Suppose the government were to buy the marketable surplus of 23 main agricultural commodities grown by farmers, then the federal food subsidy bill could go up to about 9-9.5 lakh crore,” said Ashok Agrawal, an analyst with Comtrade, a commodities trading firm. That’s up five times from current levels of 1.7 lakh crore.

Experts are still unsure of reliable administrative ways to ensure MSPs for farmers without concomitant costs.

Economist NR Bhanumurthy of the Dr BR Ambedkar School of Economics University, Bengaluru, said he did not think a legal guarantee for support prices that cuts away from market forces of demand and supply would be practical.

“It will be a huge fiscal shock and the government cannot keep tinkering with the markets,” Bhanumurthy said, adding, “Input support measures, such as cash transfers, are better than output support measures.”

Some economists, such as PK Joshi, the former chief of the International Food Policy Research Institute, have argued that a price deficiency payment system could be an option, whereby the government pays the difference between declared MSPs and market rates to farmers

This option was implemented under the name Bhavantar Bhugtan Yojana by the Madhya Pradesh government on a pilot basis in the 2017-18 kharif season but was later abandoned.

Joshi was named as one of the members of a panel appointed by the Supreme Court to look into the three controversial agri reform laws that were repealed this month after 14-month-long protests from farmers. The farm groups refused to engage with the panel on the grounds that the people on it had, in their stated positions, already come out in support of the laws the protesting cultivators opposed.

One key issue with the price deficiency payment option was that farmers and traders could rig the system by settling for lower prices so that the government makes good the shortfall between market rates and MSP. Moreover, inferior quality produce could qualify for MSP rates under this system, as was evident in Madhya Pradesh’s pilot project.

MSPs, which began with the Green Revolution, are set such that they offer 50% returns over cost but mainly benefit paddy and wheat growers because the government procures only these two commodities in sufficiently large quantities.

Indian farmers receive lower-than-international prices for much of their produce because of increasing costs of cultivation, inadequate markets and the government’s policy to keep food prices low. This has worsened agriculture’s terms of trade, measured as a ratio of prices of agri-products to prices of manufactured items. The crisis, therefore, is not one of low production, but of low prices, experts say.

MSPs are linked to cultivation costs, which are increased every year. They also have a bearing on inflation.

Every 1 percentage point increase in MSPs leads to a 15-basis point increase in inflation, according to Nomura economist Sonal Varma. A basis point is one-hundredth of a percentage point.

Economists say an MSP mechanism that ignores dynamics, such as demand and global prices, and creates distortions. If it is not profitable for private traders to buy at federally fixed MSP, when demand is low, then the private sector will simply exit the markets, they argue.In such a scenario, the government simply cannot be a monopoly buyer of all produce.

The government already procures surplus quantities of rice and wheat, which often become unmanageable. The government on average holds at least 70 million tonnes of rice and wheat in federal stocks, whereas food-security norms require reserves of 41.1 million tonnes as of July and 30.7 million tonnes as of October each year.

Economists argue that if MSP is made mandatory, then India’s agricultural exports could become non-competitive because the government’s assured prices are way higher than both domestic and international market prices. No trader would want to buy at a higher price and export at a lower rate.

According to economist Ashok Gulati, the cost of procuring, storing and distributing rice to the poor comes to about 37 a kg. For wheat, it is around 27 a kg. The cost to company (CTC) of labour of the Food Corporation of India (FCI) is six to eight times higher than private labour. Therefore, market prices of rice and wheat are much lower than what it costs the FCI to buy them.

Gulati was also a part of the SC-appointed panel the cultivators declined to engage with.

The MSP policy benefits farmers only in a handful of states, according to government data.The 70th round of National Sample Survey showed only 13.5% of paddy growers and 16.2% of wheat growers actually received MSPs.

Experts also say that while MSPs have incentivised foodgrains over other crops, they have given rise to serious imbalances of water and land resources and shifted land away from crops, such as pulses and oilseeds, necessitating costly imports. They add that MSPs, as administered prices, tend to distort market prices by often ignoring the demand side, international prices, export competitiveness, and ecological impacts of crops such as paddy.

“Support to farmers can never be in question. But support in the form of MSP, which is market-distorting, raises questions, such as ‘whether can we move to other ways of supporting farmers that cause less collateral damage,” said Pravesh Sharma, a fellow at New Delhi’s Indian Council for Research on International Economic Relations.

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  • ABOUT THE AUTHOR

    Zia Haq reports on public policy, economy and agriculture. Particularly interested in development economics and growth theories.

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