MSP as subsidy for consumer, not farmer - Hindustan Times
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MSP as subsidy for consumer, not farmer

Feb 26, 2024 11:09 AM IST

When MSP is higher than the market price, private traders will refuse to buy, thus leaving farmers with unsold surpluses or forcing the government to step-in

If you’re someone who finds economics difficult to grasp and its agricultural subset befuddling, let me try to acquaint you with opinions from both sides of the sharp divide over whether minimum support prices should be made legally binding and how they should be calculated. Ashok Gulati, Infosys Professor for Agriculture at ICRIER, bases his position on certain facts. First, MSP only applies to 27.8% of India’s total agricultural produce. Consequently, just 10% of agricultural households benefit from it. Some of the fastest growing sectors like poultry, surging at 8-9%, fisheries, escalating at 7-8% and, milk, growing at 5-6%, don’t have access to an MSP regime.

Members of the farm union Bharatiya Kisan Union (Ekta Ugrahan) block railway tracks during a protest to demand minimum crop prices (AFP Photo) PREMIUM
Members of the farm union Bharatiya Kisan Union (Ekta Ugrahan) block railway tracks during a protest to demand minimum crop prices (AFP Photo)

Against this background, Gulati says making MSP legally binding for 23 crops would be “anti-farmer”. When MSP is higher than the market price, private traders will refuse to buy, thus leaving farmers with unsold surpluses or forcing the government to step-in and buy everything. The first would be a disaster for farmers. The second would have very adverse budgetary and fiscal implications for the government.

Himanshu, Professor of Economics at Jawaharlal Nehru University, counters this. When farmers demand legal backing it’s because for 21 crops, other than wheat and rice, MSP isn’t actually implemented. Therefore, by calling for legal backing, they are asking the government to do what it’s committed to. In other words, keep its word.

Himanshu points out the reason only 10% of agricultural households benefit from MSP is because in practice it’s not extended beyond wheat and rice. If it were, the percentage would rise to 30 or even 40. Second, just because poultry, fisheries and milk are growing without MSP doesn’t mean crops don’t need it. That’s a fallacious argument, he says.

More importantly, Himanshu adds, MSP is a form of price stabilisation. In fact, there are few farmers in the developed world who don’t have such support. Second, when MSP is higher than the market price, it doesn’t follow that the government will have to buy everything. It only has to initially bridge the difference between the two prices. Once it does, market prices will automatically rise. At that point government intervention will cease.

Where both Gulati and Himanshu agree is over the public perception that MSP is a subsidy for farmers. They believe it’s a subsidy to consumers. For instance, Himanshu says, when the government gives free rice and wheat to 800 million MSP becomes the subsidy they’re getting.

Finally, both also agree you cannot easily estimate the cost of making MSP legally binding. Not only will it vary region by region but, more importantly, it depends upon the prevailing market price and how large is the difference the government has to make up and for how long. Himanshu adds a further point. The actual cost is the difference between the price the government buys at and then sells. That, at least partly, is in its control. So figures of 10 lakh crore are clearly wrong. CRISIL’s estimation of 21,000 crore is closer to the truth.

Now, let’s come to a second issue: Should MSP be calculated on the basis of comprehensive costs and a 50% profit? Gulati says this will increase food inflation by 25-30%. It will also have huge budgetary or fiscal implications for the government’s free food programme. Swaminathan Aiyar believes a guaranteed 50% profit is unreasonable.

Himanshu differs. He says the government already claims C2+50% applies to wheat and rice and inflation is nowhere near Gulati’s fears. On Aiyar’s point he’s open to altering 50% but adds farmers need a proper remuneration. Also, whatever they get will add to economic growth when they spend it. It doesn’t stop with them.

One last point. Gulati says the best way of increasing farmer incomes is to incentivise diversification to high-value agriculture. Himanshu responds by pointing out that if MSP is paid on all 23 crops it will automatically encourage diversification. Farmers, he says, are businessmen who, in their own interest, will respond to incentives. Does this help? I hope so.

Karan Thapar is the author of Devil’s Advocate: The Untold Story. The views expressed are personal

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    Karan Thapar is a super-looking genius who’s young, friendly, chatty and great fun to be with. He’s also very enjoyable to read.

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