Modi’s Hike in MSPs Needs Follow Up Or It’s A Missed Opportunity

Modi govt has missed the opportunity of overseeing biggest reforms in Indian food procurement& distribution system.

The larger point is that the average farmer does see prosperity around her, but the same prosperity eludes her and this makes her angry.

(Photo Modified by Eram Gour/The Quint)

Recent hike in minimum support prices (MSP) for crops grown in India has attracted much attention especially due to the timing of announcement; just ahead of key state elections that are considered as pre-finals before 2019 general elections. Leaving politics of farm support aside, it is necessary to look at whether such hike in MSPs really benefits farmers or not.

Minimum support prices in India were not designed to be a reference market price for agricultural commodities, so that the actual market price should remain at or above that level during the marketing season.

There is no legislation that penalizes or prohibits private traders from purchasing the commodities below the MSP. Even government agencies are not legally bound to purchase from every farmer. Though some states made some effort, it remained ineffective as private traders found ways to bypass, while government agencies remained absent.

MSP: A Tactical Promise

In many other states, it is a pure assurance from the government to farmers saying they will purchase the produce in case farmers fail to obtain a certain minimum price from the private traders. However, under current MSP system the price is guaranteed only to those farmers from whom Food Corporation of India (FCI) or any other government agency physically purchases the commodity. Others just end up selling at whatever the price market fetches.

Due to this, for most of the farmers in India, MSP just remained as a political but calculated promise, without any legal sanctity.

If the government sees providing remunerative prices to farmers for the crops they produced, as the only way of increasing farm revenues there are some implications to it; ranging from producing higher than manageable surpluses of covered crops to mounting of food subsidy bill. The covered crops are the crops that are actually purchased by government led agencies. In India, procurement of the crops by government agencies is traditionally limited to few crops like rice, wheat and some pulses added to them recently. In the non-food crops segment, cotton is mainly supported. There is very little procurement of other crops as government agencies hardly make any effort in that direction.

Economics of MSP

The main aim of the procurement of crops during harvest season from farmers in India by government agencies is to help prevent distress sales at lower-than-production cost. Due to the seasonal nature of agricultural crop production, the prices of the same tend to be lowest during harvest season and gradually rise in subsequent months. If the aggregate production is large market forces may not be able to fetch remunerative prices to farmers, in which case purchases by government agencies at predetermined prices — that are arrived at by taking cost of cultivation into consideration — help prevent distress sales by farmers. These agencies later sell the crops at higher prices during off-season.

Cotton is a commercial crop and there is hardly any government interest in distribution of this crop.

Cotton Corporation of India (CCI),  which is a nodal agency for MSP procurement, sometimes ends up in profits by selling at higher prices during off-season. Any losses in its operations arising out of failure to obtain higher prices later in the season are reimbursed by government of India (GOI). In case of food crops, that are mainly purchased from the farmers in India to fulfill the responsibility of distributing the basic food grains to poor consumers at cheaper and stable prices, the nodal agency FCI ends up in losses as it purchases at highest possible prices and sells at lowest possible prices. These losses are reimbursed to FCI as food subsidy by GOI.

The recent hike in MSPs will have meaningful impact only in case of covered crops viz., rice, cotton and pulses — if the agencies continue procurement. In case of other crops it may remain as mere headline, as there is hardly any government purchase happens although it is implicitly promised. Further, in case of covered crops, while hike for cotton may push up working capital requirement for CCI and the mills, hike in case of rice may push up the food subsidy bill, in proportion to the quantum of hike in MSP.

Skewed Cropping Patterns

Globally, India is in commanding position in case of rice and cotton and changes in production and consumption of these crops in this country are keenly watched by others. Government price support program is one of the reasons for reaching such a stage. Also, stock piles of rice held by GOI are often questioned in WTO talks, which is a result of government led procurement in excess of the requirement. The procurement of few crops in excess of requirement and neglect of other crops despite announcing similar programs leading to skewed cropping patterns towards these few crops and causing steep growth in imports of neglected crops.

Missed Opportunity

Although hike in food subsidy bill is in proportion to hike in MSP, it also includes operational inefficiencies on the part of FCI. Modi has promised to split the FCI, before 2014 general election — to plug these inefficiencies — and set up a committee for the purpose headed by former union minister Shantharam.

The committee despite agreeing to the fact that losses are arising due to the operational inefficiencies, suggested not to split FCI. It proposed to continue the engagement of private companies for procurement, that was in place since UPA I regime. Because of this, Modi government has effectively missed the opportunity of overseeing biggest reforms in Indian food procurement and distribution system.

(The author is an agri consultant. This is a Reader’s Blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.