JOIN USCodify MSP, remove doubts
One silver lining to the 24% fall in quarterly GDP between April and June was that growth in the agriculture sector was positive at 3.4%. This is the first time in India’s history that we are experiencing a steep economic recession without any adverse shock of drought or a failed monsoon affecting agriculture. Another notable positive development was the robust procurement of the spring harvest (rabi crop), especially of wheat. Not just the frontrunners like Punjab and Haryana, but also states like Rajasthan, Madhya Pradesh and Uttar Pradesh saw good rabi procurement by the Food Corporation of India (FCI). When FCI does procurement, usually through its designated agencies based in various states, it means that the farmer gets the assured price, called the Minimum Support Price (MSP). That was over Rs 1,900 per quintal this time.
The MSP is determined as a political decision, based on inputs given by the Commission on Agricultural Costs and Prices (CACP). This commission was set up nearly 60 years ago, and provides a logical and scientific basis to costs, and hence a reasonable price to be paid for the crops. Due to input cost escalation, for seeds, pesticides, diesel, credit, fertilisers, etc., the MSP, too, needs to go up so that the farmer receives an adequate return. Otherwise, it is a loss-making proposition. In the past 50 years, the average escalation in MSP has been about 6% per year for wheat and similarly for rice. But the actual procurement by the government has gone up nearly 70 to 80 times during this period.
This procurement by the FCI has three objectives: firstly, to give an adequate support price to the farmer; secondly, to ensure food security to the nation by keeping this in buffer storage; and thirdly, to provide this grain to the Public Distribution System (PDS), i.e., the ration shops, at very cheap prices to make it available to the poor and needy.
The difference in price paid to the farmer and received from the PDS is the food subsidy budget of the central government, which has crossed Rs 2 lakh crore, ie., 1% of GDP. The procurement process is humongous, with a total crossing 90 million tonnes of wheat and paddy. Even though the MSP assurance covers 23 crops, including cereals, oilseeds, pulses and commercial crops like sugarcane and cotton, the bulk of the spending is on just two crops, wheat and paddy. Moreover, despite being a national policy, the farmers who sell their crop to FCI come from only half a dozen states. And these constitute barely 6% of all farmers in the country.
The volume of procurement by FCI is huge and constitutes nearly a third of all grain production in the country. That is a big intervention in the agriculture economy, and something that displeased even the World Trade Organization. But back in 1994, India convinced the negotiators who were forming the WTO that on a net basis, the Indian farmer was not pampered but, in fact, had negative support from the government. The terms of trade are, in fact, tilted against the farmer vis-à-vis industry, and this has been sought to be compensated with measures like MSP. However, it is important to note that even if only 6% of farmers get paid from the FCI procurement process, the price floor established by the MSP does indirectly benefit a much greater proportion of farmers.
Forty years ago, possibly for the first time, there was mass mobilisation and an agitation of farmers led by a most unlikely and uncharismatic leader called Sharad Joshi. He was a mathematics graduate who came from a family with no background in farming. Yet, he understood the farmers’ plight, and his earliest slogan was “give us a fair price for our sweat and toil”. This was the famous onion agitation of 1978-79 and then the tobacco farmers agitation in 1981.
Getting a fair price, or some assurance is a basic need of the farmer. Suffering from the vagaries of nature, it is made worse due to the exploitative practices of middlemen, who enjoy disproportionate bargaining clout. They can and do resort to deceit and trickery to exploit the small farmer. This is the reason for the genesis of the Agriculture Produce Marketing Committee (APMC), a system introduced nationwide in the early 1960s. The APMCs were supposed to be run democratically, with periodic elections, and a majority representation of farmers. The APMC was a formalisation of the mandi system, which has existed since centuries. But over the years, even the APMC system was captured by vested interests, with a political nexus and dynastic control. To this day, there are barely 4,000 APMC market yards, when the need is for maybe 40,000 market yards in the country. The licence raj of the APMC system has a stranglehold on the farmer as well as the buyer, who were compelled to only go through this statutory middleman.
It is this middleman whose power has been diminished by the new farm laws. The farmer is now free to sell his produce within or without the APMC. If he has more choice, then that can only be a good thing. But for the full import of this reform to be felt, it will take some time. There is fear that a new class of middlemen representing corporate interests will emerge. But reform cannot be held hostage to imagined fears. However, what is needed is some price assurance scheme, which was administered using the FCI and MSP.
In a fully developed market economy, price assurance is available to the farmer through the futures markets. But this is considered as speculation and forward/futures markets need to be more liquid and price discovery more transparent. Till then, some form of government intervention in MSP is needed. It is the fear that with the dilution of the APMC, even the MSP regime will go away that is currently fuelling farmers’ agitations. And this needs to be addressed not just by verbal assurances, but by some form of codified, written promise by lawmakers. With this important supplement, the new farm laws will represent a significant step in economic reforms in agriculture.
(The writer is an economist and Senior Fellow, Takshashila Institution)(Syndicate: The Billion Press)