Farm price, market assurance will bloat fiscal deficit

Stung by depressed price-realisation by farmers, much below the minimum support price (MSP), and with impending general elections next year, the Narendra Modi government announced in the Union Budget for 2018-19 that henceforth, they will be assured MSP which is at least 1.5 times the cost of production. PTI file photo

Stung by depressed price-realisation by farmers, much below the minimum support price (MSP), and with impending general elections next year, the Narendra Modi government announced in the Union Budget for 2018-19 that henceforth, they will be assured MSP which is at least 1.5 times the cost of production.

Mere assurance of a remunerative price is of no use unless the farmer is able to sell his entire produce at this price. Keen to ensure that this happens, the government asked NITI Aayog to come up with suggestions. The latter prescribed three alternatives, namely: market assurance scheme (MAS) or price deficiency payments or incentives to private sector to buy farmers’ produce at MSP.

Under MAS, agencies of the state buy the produce directly from farmers at MSP. Under the second option, the government does not buy, but instead it reimburses the shortfall in price realised from sale (albeit in the mandi) vis-à-vis the MSP. Under the third alternative, the private sector is incentivised to buy at MSP.

In the follow through, a group of ministers (GoM) under Union Home Minister Rajnath Singh has approved nationwide implementation of MAS covering 23 agricultural crops, including wheat and rice. The scheme will cover up to 40% of the marketable surplus and cap the price loss (difference between farm harvest prices and MSP) to be eligible for compensation at 25% of MSP.

The Union government, apart from absorbing procurement cost in full (roughly 15% of MSP), will bear 100% of the price loss up to 20% of the MSP and half the price loss between 20% and 25% of MSP. The states will share only half of the shortfall between 20% and 25%. Of the overall cost of the scheme, the Centre’s share would be 93.75% and the states will contribute 6.25%. The states will have to pay for any additional support they wish to give farmers.

Though bandied about as a revolutionary step in the overarching mission of doubling farmers’ income, the expected outcome is doubtful even as the scheme holds dangerous portends for both the Union government and the states via increasing their respective subsidy bills.

During 2017-18, the total payment on food subsidy under the National Food Security Act (NFSA) was Rs 1,40,000 crore, including Rs 1,15,000 crore towards excess of procurement price over the heavily subsidised issue price of wheat, rice and coarse cereals (Rs 1/2/3 per kg respectively) for sale through the public distribution system (PDS) and Rs 25,000 crore as incidental cost on storage and handling. Additionally, the government spent Rs 35,000 crore on the price support scheme for pulses and oilseeds, taking the total to Rs 1,75,000 crore.

As for 2018-19, according to NITI Aayog, the total cost of MAS is estimated to be about Rs 1,11,000 crore. Of this, the Centre will bear about Rs 1,05,000 crore. Together with Rs 1,15,000 crore being the subsidy to cover the excess of procurement price over issue price under NFSA (same as last year), the total outgo would be Rs 2,20,000 crore. This is an increase of Rs 45,000 crore over the corresponding amount spent during 2017-18. Against the budget allocation of Rs 1,69,000 crore for 2018-19, this is higher by Rs 51,000 crore and will have a destabilising effect on the fiscal deficit.

One wonders whether central agencies such as the Food Corporation of India (FCI) and state institutions have the infrastructure and wherewithal to carry out procurement operations on the scale contemplated under the scheme. The experience with similar schemes run in the past for specific crops, such as pulses, oilseeds, vegetables (onion, tomato, etc) scale does not instil confidence. That apart, with the compensation capped at 25% of MSP, besides limiting purchase to 40% of the marketable surplus would still leave farmers dissatisfied.

Furthermore, has the government thought through the fate of millions of subsistence farmers who do not have a marketable surplus (they produce food primarily for self-consumption) and a vast number of landless workers who depend entirely on the PDS or market? While they have nothing to gain from the price support scheme, they will be hit by the inflation triggered by it; all the more when the quota for subsidised supply under NFSA, namely five kilos per person per month, is far from being adequate in relation to the need.

The responsibility for disposal of the stocks purchased from farmers lies entirely with the states. In order that the state does not suffer a loss on its sale, it should at least realise the effective purchase price (MSP minus price loss support) plus the carrying cost. If it does not – the most likely scenario — then it could suffer loss. This would be in addition to their 6.25% share under the scheme and would be seriously destabilising on the overall finances of the state.

The scheme is hugely negative for the finances of the Centre and the states besides for subsistence farmers and landless workers, even as the intended impact (albeit positive) on farmers offering marketable surplus will be seriously constrained by the weaknesses in state procurement, handling and distribution machinery.

Policy reforms needed

There is an inherent flaw in the approach. The government is looking for an administrative solution to a problem that requires policy reforms. If the farmers are not getting a good price, it is because the markets for agri-produce are monopolised by intermediaries (in many cases, politicians or their relatives) licensed by state authorities to buy their stuff in designated ‘mandis’/market platforms.

Even as the consumer pays a high price, the intermediaries/traders pass on only a fraction of it to the farmers. The solution lies in liberating the agri-markets from state controls and giving farmers more options to sell their produce. This can happen only if states bring about legislative reforms such as the abolition of the APMCs (agricultural produce marketing committees). Given that a majority of states are under BJP rule today, it should not be difficult for Prime Minister Narendra Modi to crack the whip.

(The writer is a New Delhi-based policy analyst)

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