MSP law is a necessary signal to farmers

Farmers are once again barricading roads and highways to the national capital. It seems like a repeat of what happened three years ago, when the three farm laws tabled in parliament had to be withdrawn due to farm unrest. This time, the agitation is for a law to make Minimum Support Price (MSP) a legal guarantee.

MSP was introduced in 1967 and is a price support scheme which covers 23 crops, including cereals, pulses, oilseeds and commercial crops like copra and cotton. Sugarcane also has support prices given both by the Centre and the states.

But the MSP scheme does not have statutory backing in law. The MSP for crops is set every year on the advice of the Commission for Agricultural Costs and Prices.

That advice may or may not be taken by the Union cabinet. Further, even after announcement of MSP for various crops, it is enforced only for a few crops, mostly for wheat and rice.

The Union government (along with some state governments) procures wheat and rice at the MSP. The procurement benefit goes only to a few select states. The mandi tax collection which goes to state governments is proportional to the amount of procurement. For a state like Punjab, it is a significant source of the state’s revenue.

Some states like Madhya Pradesh have occasionally applied MSP-based procurement to pulses also. In Maharashtra, the government tried to enforce MSP-based procurement of pulses on all private traders, who were immediately up in arms and refused to cooperate.

Maharashtra was hoping that higher prices could be extracted from private traders and need not be paid from the state’s own budget. That scheme had to be given up.

So, MSP in practice only helps rice and wheat farmers, and that too those who have large marketable surpluses, and who seem to be confined to Punjab, Haryana, and western Uttar Pradesh.

Is converting MSP into a legal guarantee a bad idea? Not really. For several reasons. Firstly, it won’t be a fiscal disaster as some fear. MSP comes into the picture only when free market prices dip below, which on an average will happen only half the time.

Secondly, as soon as the government intervenes to procure crops, the prices start moving up, negating the need to continue indefinitely. Thirdly, in effect, it is a price insurance mechanism, needed because forward markets and commodity derivatives markets are not fully developed and are beyond the reach of most farmers.

Crop prices are extremely volatile and need some insurance coverage, and MSP is like an “option” which protects the downside. The PM Fasal Bima Yojana has not been effective in providing insurance against a fall in prices.

Fourthly, the proposed MSP “guarantee” is much like the rural employment guarantee (NREGA), which works as a proxy for unemployment insurance. That scheme has proved to be a safety net during times of distress, such as famines, droughts, or a pandemic.

Similarly, MSP guarantee is a proxy for price insurance absent forward markets. Sixth, the time has come for an MSP law because of the several woes of farming households. Hence, it is no longer relevant to merely evaluate the prospect of a law in terms of costs and benefits. Farming households are in distress.

Stepping away from the MSP issue, let’s look at some stylised facts. The most stark and relevant data for farm households is that from the 70th and 77th rounds of the National Sample Survey, which had a Situation Assessment of Agricultural Households, in 2013 and 2019, respectively.

During this period, the farm household saw wage income overtake income from cultivation. And monthly household income at around Rs 10,000 in 2019 was far below the national average.

The level of indebtedness remained constant at around 50% of households. Much of the debt was for current expenses and consumption and not for investment purposes.

In fact, the farmers’ income growth had slowed down from 3.4% per annum during 2004 till 2011 to 2.5% from 2012 till 2019. Keep in mind that national income was rising much faster during these periods. 

So, farming households are falling behind, and it is no wonder that poverty is largely confined to agricultural or rural households. The government had announced in 2016 that farmers’ incomes would double by 2022, but that did not happen.

A recent government release says it did double in 10 years from 2011 onwards, but that includes imputed income of free food distributed under the National Food Security Act.

Farm sector woes are many. Risks arise from multiple sources. Price volatility, climate change induced unseasonal wet and dry spells, pest attacks, world geopolitics spiking prices, frequent bans on exports denying farmers windfall gains, and an anti-farmer pro-urban consumer bias in policies.

The adverse terms of trade for farm goods vis-à-vis industrial goods or services, and the frequent ban on exports is like a de facto tax on farm incomes. So, those people who complain that farm incomes are not taxed are not fully cognisant of the burden on the farmer. 

To add to these woes, land fragmentation is relentless and continues in every successive generation. India now has 141 million small land parcels, double of what we had 50 years ago.

Smaller land parcels mean lower productivity and less scope for exploiting economies of scale. Nearly 90% of farming households have less than 2 hectares of land holding. How can their income growth keep pace with national GDP growth?

Productivity is low and they are stuck in farming because there are no large-scale, higher paying, secure jobs available in the industrial or services sector. Indeed, the lack of large-scale employment creation outside of farming is a major cause of farm sector woes in India.

The sustainable solution to farm distress lies outside agriculture, in industry and services. Meanwhile, several initiatives like the mandi law reform, relaxing export bans, allowing contract farming, credit to tenant farmers, incentives for crop diversification, electronic linking of mandis, can all make a difference, large or small.

In this messy and second-best world, the enactment of MSP law, without being fiscally too costly, will give a strong positive signal.

(The writer is a noted Pune-based economist) (Syndicate: The Billion Press)