Legalising MSP will prove to be anti-farmer

In the continuing stalemate over the three farm laws, the biggest sore point is the insistence of the agitating farmers that the MSP (minimum support price) should be legally guaranteed.

At present, the Centre notifies MSP for 23 farm items. The Food Corporation of India (FCI) and other state agencies buy paddy and wheat, besides a few other items such as coarse cereals and pulses, at the MSP. These are meant for feeding the public distribution system (PDS) and giving food to beneficiaries at heavily subsidised prices under the National Food Security Act (NFSA).

Out of about 150 million farmers, a mere 8% of them get to sell their produce to the state agencies. The remaining 92% are at the mercy of licensed traders and commission agents at the APMC (Agricultural Produce Marketing Committee) mandis. Their realisation is much lower than MSP rates.

The new central laws have opened up unlimited opportunities for farmers to sell their produce (even as APMC/mandis remain intact), thereby helping them get higher prices, which can even exceed MSP depending on the demand-supply scenario. Yet, farmers are insisting on a legally guaranteed MSP. This is bizarre.

In a contract between two private entities, how can the government legislate that the buyer must pay MSP? If a law is passed making payment less than MSP punishable, which trader will dare buy? It could result in rotting of farmers’ produce in their fields, forget their expectation of fetching a good price.

It would be naive to believe that the government will buy every grain of what is left over. Already, the food subsidy bill is unsustainable (over Rs 400,000 crore for 2020-21). One shudders to fathom what the subsidy pay-out will be if it were also to buy (at MSP) all the tonnage not picked up by private traders. This will also have grave implications for India at the World Trade Organisation (WTO).

Under the Agreement on Agriculture (AoA) of the WTO, a developing country cannot give aggregate measurement support (AMS) — an acronym for subsidies -- in excess of 10% of the value of its agricultural production. The AMS includes “product-specific” subsidies and “non-product specific,” namely subsidies on agricultural inputs like fertilizers, seed, irrigation and power.

The “product-specific” subsidy is the excess of MSP paid to farmers over the External Reference Price (ERP), multiplied by the quantum of agri-produce. Whereas the MSP is taken for the relevant year, the ERP is the average of the international price prevailing during 1986-88, fixed in rupee terms.

In a submission to WTO (May 2018), the US had contested the AMS numbers reported by India. For instance, on rice, it stated that during 2013-14, Indian AMS was Rs 1,78,000 crore, or 77% of the production value, against only Rs 12,000 crore or 5.45% notified by India. The former wrongly inflated Indian subsidy by considering even quantities not procured by state agencies – as such purchases are not eligible for subsidy support.

In case the MSP is legalised, however, implying that the Centre undertakes to buy all of the farmers’ produce at this price, this will give credence to the position taken by the US. It will result in a scenario whereby Indian subsidy could go well beyond 10%, resulting in violation of our commitment under AoA of the WTO.

A legally guaranteed MSP will also nip in the bud any chance of reforming India’s food subsidy regime. Currently, the Centre administers subsidy through FCI, et al, who deliver food to beneficiaries at Rs 3/2/1 per kg, and get reimbursement for the excess of cost of purchase, handling and distribution as subsidy. The cost of purchase is nothing but MSP. However, this mechanism is prone to inefficiencies, inflated cost, widespread leakages and misuse.

All this can be curbed only if the subsidy is given directly to beneficiaries using direct benefit transfer (DBT) and let them buy from wherever they choose to, albeit at market price. This will render MSP irrelevant as then agencies need not procure food.

If now the government were to legalise MSP, logically, it will continue to order agencies to purchase food to deliver to beneficiaries at the subsidised price. This implies that DBT will be off the table as it would be fallacious to give subsidy twice over – first by supplying food at a subsidised price and then by transferring cash to the beneficiary’s bank account.

The government should stick to the three new farm laws. This will help the development of parallel and competitive markets (non-APMC), help farmers realise better price (especially the majority of small and marginal farmers) and pave the way for the transition to DBT.

This will also help India at the WTO as unlike the existing system of subsidising agri-inputs and MSP to farmers, which are treated as “actionable” subsidies under AoA, the DBT to farmers is “non-actionable.” Direct transfers are not subject to any cap; hence, these can be given without any limit and yet remain compliant.

(The writer is a Delhi-based policy analyst)