On December 11, farmers returned home after staying in for more than a year. While this retreat may be the culmination of a valiant struggle against the three laws that were passed in the parliament and then repealed last month, it is not a retreat as far as farmers’ demand for a better agricultural policy and remunerative prices for their produce is concerned. Not only did they manage to thwart attempts by the government to allow greater entry of private capital and withdrawal of state support and protection, but they also successfully managed to bring the issue of guaranteed Minimum Support Price (MSP) on the agenda for further discussions.
There is little clarity on what a guaranteed MSP means and what implications it has for the majority of farmers not just in the north-western states of Punjab, Haryana, Uttar Pradesh, Rajasthan and Uttarakhand, where the protest saw the maximum mobilisation, but also for the rest of the country including the eastern, central and southern states, where the MSP system has hardly operated. The challenge for the farmers’ movement is not just to go beyond the regional concentration of north-western states but also to make its movement broad-based to include all categories of farmers, including agricultural labourers. This is not a difficult task and the demand for a fully functional MSP system with guaranteed operation based on the principles of support price intervention is not just possible but will also be broad-based and inclusive.
Current system not an MSP system at all
While there is a broad agreement that the current MSP regime is regionally unbalanced with farmers of only a few states benefiting from procurement and biased towards a few crops, in particular rice and wheat, the biggest problem is that the current system is not an MSP system at all. It is essentially a public procurement scheme to meet the requirements of the National Food Security Act (NFSA). Even though the NFSA proposes the access and availability of a wide variety of nutritious food, including coarse cereals, pulses and edible oil, the current Public Distribution System (PDS) is entirely dependent on rice and wheat. As a result, while the excessive bias towards rice and wheat is not as much a response to the needs of farmers for an effective MSP, it is also inefficient, leading to concerns of harmful impact on natural resources.
But what would an effective MSP be? An MSP system is essentially an instrument to protect the farmers from fluctuations in output prices by assuring remunerative prices when prices fall below a specified price, the MSP. The fall in prices may be a result of excess production and over-supply or a result of international factors. In any case, the MSP system by definition requires an intervention by the government to purchase the crop for which prices have fallen below the MSP. Such an operation is expected to take out the excess supply from the market, putting upward pressure on domestic market prices and thereby restoring the prices to a level equal or higher than the MSP. It does not require the government to purchase all the quantity produced as this will create artificial scarcity pushing prices higher. It also does not require the government to force private trade at a specified price. But it does imply that the government will not purchase the output if the market prices in the domestic market are at the level of MSP or higher than that. It is this basic principle which the current MSP system does not follow and thereby makes the whole MSP system effectively an instrument to support the NFSA.
In reality, the government announces MSP for 23 crops but the effective procurement is only for rice and wheat. There is hardly any procurement for most other crops. Occasionally, the government has procured pulses and cotton but these procurements are ad hoc and ineffective. Even for rice and wheat, the procurement is not to stabilize the prices but to fulfil the requirements of NFSA. However, of late it has been seen that the government procures excess stocks of rice and wheat, creating artificial scarcity in the market. As of December 1, 2021, the stocks of rice and wheat are 83 million tonnes (mt), almost four times the buffer and strategic requirement of 21 mt as of January 1. The excess stock is not just a waste of national resources but is also distortionary in nature as far as prices are concerned, contrary to the stated objective of MSP to stabilise prices. It is important to reiterate that the so-called food subsidy bill of more than 2 lakh crore is not a subsidy for farmers but is effectively a subsidy for consumers that the government is bound to fulfil as part of NFSA. But that also implies that for many other crops for which market prices are much lower than the announced MSP, there is effectively no protection available. This is true for maize, an important crop in Bihar, as well as several coarse cereals which are grown in rainfed and arid regions of the country. The absence of any price support for pulses and oilseeds has also contributed to the country becoming dependent on imports in the last two decades from being fully self-reliant until the early 1990s.
How to have an effective MSP
So how difficult it is to implement an effective MSP? The basic requirement is that MSP be announced which not only takes into account the cost of production but also strategic requirements of food security. Which means that the MSP for pulses and oilseeds need not only be enough to cover costs plus profits but also be made relatively more remunerative compared to other crops for which the country is a surplus producer. As far as the mandate to have an MSP above costs is concerned, MSP at 50 per cent profit margin on a broad measure of costs has already been agreed upon following the Swaminathan Committee recommendations. While the current Commission for Agricultural Costs and Prices (CACP) is mandated with recommending MSP, its recommendations are not binding and actual MSP is announced on political considerations. The first step would be to make the recommendations of CACP statutorily binding on the government.
The second step is to have a price-monitoring mechanism that is regionally representative. The government currently has a system and that can be strengthened. But a true guarantee of MSP requires the government to intervene in the market and procure until the prices reach a level of MSP or higher. The need for government intervention should not be political but should be based on some formula that is binding on the procurement agency. This intervention is purely scientific and irrespective of any other consideration. How much will this cost the government? Unlikely to be a significant amount as long as the government has a mechanism to distribute the crop produce procured. A good mechanism would be to offload the grains procured during times of high inflation when the consumer prices are rising high. An MSP system will then be an effective counter to inflationary pressures in food providing much-needed relief to the poor working class. At times, it can also be exported if the international prices are higher than domestic prices, thus earning precious revenue to the government. In effect, the net cost to the government will depend on the need for procurement and the distributional mechanism.
A better way would be to use the existing distributional mechanism in the NFSA to distribute coarse grains, pulses and edible oil through the PDS. This will not only help strengthen nutritional security for the majority of the poor in the country but also help the MSP reach small and marginal farmers in hitherto neglected areas as far as agricultural support is concerned. This is much needed in poorer states such as Bihar, where the MSP system is non-existent, and also in arid and rainfed regions of Vidarbha, Telangana, Karnataka and other areas which primarily grow coarse cereals, pulses and oilseeds. This will also lead to an increase in the production of these crops, helping the government save precious foreign exchange for importing pulses and edible oil and ensure food security and sovereignty.
MSP system does not solve real problems
While all these are easily doable and within the domain of the government fiscally, infrastructurally and institutionally, an effective MSP system is only an emergency provision. It does not solve the real problems of agriculture. For the farmers in the country, the last decade has brought in untold miseries. Already suffering from high fertilizer prices due to the Nutrient Based Fertiliser Subsidy (NBFS) regime, they suffered the twin droughts of 2014 and 2015 without any state support. This was accompanied by a collapse in commodity prices since August 2014. But the farmers fought on and agriculture was on its way to recovery when the twin policy shocks of demonetisation and GST broke the back of the rural economy. Since then, the slowdown in the economy and the pandemic has contributed to declining farmer incomes, declining rural wages and rising unemployment. Faced with all these, the farmers also suffered from the government’s insensitivity, which resulted in a decline in real investment in agriculture and rising input costs led by rising diesel and electricity prices.
The primary reason for farmers’ indebtedness and declining profitability has been the insensitivity of government policy. At this juncture, the demand for guaranteed MSP is unlikely to resolve the structural issues of low investment in agriculture, low research and extension, and declining demand in the economy. But it certainly can alleviate some of the sufferings and at the same time contribute to broad-basing the farmers’ movement by expanding the scope of the price intervention to all regions and farmers.
(Himanshu is Associate Professor, Centre for Economic Studies and Planning, JNU)