MSP isn’t a solution to Indian farmers’ woes

Indian farmers are agitating for assuring Minimum Support Price (MSP) and repealing new farm laws. Covering all 23 crops under MSP is a gigantic task, requiring huge budget allocations to the extent of USD 246 billion (Rs.18 lack crore) per year.

The agitating farmers are mainly demanding guarantee of Minimum Support Price (MSP), although the new farm laws are not related to MSP in any way and government time and gain saying that the procurement under MSP will continue. With the opening up of trade outside APMC markets, formalisation of contract sales between farmers and private companies and removal of stock limits for traders, farmers are apprehensive about continuation of MSP through public agencies. Majority of the farmers grievances (46% of all grievances) are related to low crop prices as per the Department of Administrative Reforms and Public Grievances (DARPG) even before the new farm laws.  

With the passing of three new farm laws, Indian farmers are more exposed to free market forces. The new farm laws will increase competition from buyers for farmers produce, hence logically increase prices. But farmers are fearing that a few corporates will monopolise entire market operations, leading to weakening of both Agricultural Produce Market Committee (APMC) markets and MSP, which reduce government capacity to procure at MSP.  Farmers fears are exaggerated, although there is some truth in apprehension of possibility of increase in price volatility. 

The intent of farm bills is to open more options to farmers to sell their produce at higher prices than APMC markets. With the entry of private sector, investors will come to develop local markets, cold chains and warehouses and aggregation centres to directly buy from the farmers, which intern increase farmers prices and incomes. However, free market alone does not guarantee higher prices, there is a need for introducing price insurance schemes to safeguard farmers against low prices. Although crop insurance schemes like Prime Minister Fasal Bhima Yojana (PMFBY) was in implementation, it covers only production risk with complete neglect of price risk. 

Now, the only tool available with the government to guarantee price is procurement at MSP. To cover all 23 crops under MSP is a gigantic task, needs huge budget allocations, support from state and local marketing boards to evolve economically and politically feasible solutions given that the state capabilities are limited and vary. Some states like Punjab are historically in better position to procure their major crops, paddy and wheat, while some other states like Bihar and Orissa have limited capabilities. Because of this, Punjab and Haryana farmers received higher prices then and farmers in East-Indian states like Bihar over several decades. 

In addition, except paddy and wheat, there was no proper procurement mechanism for the remaining 21 crops for which MSP is announced. Although under decentralised procurement system, some states are procuring pulses and oilseeds, they just cover less than 5% of the production.  

India cannot depend on achieving target of doubling farmers’ incomes just by procuring only paddy and wheat that too only a handful of states. The current MSP policy is hugely discriminatory against rainfed farmers who grow pulses, oilseeds, fruits and vegetables, who constitute more than 70% of the 12 crore farm families in India. The prices of oilseeds were less than 10 to 30% in most of the markets during the recent kharif season. The biased policy also contributing to huge import of edible oils each year incurring enormous cost to Indian exchequer to the extent of Rs.70,000 crore(USD 9.5 billion).  Whereas fruits and vegetable are entirely out of the MSP procurement policy.  

To correct the policy bias in MSP operations, the government of India introduced the PM-AASHA(Pradhan Mantri-Annadata Aay Sanrakshan Abhiyan) in 2018, as an effort to ensure  MSP for all 23 crops. PM-AASHA is having three sub-schemes i.e. Price Support Scheme (PSS), Price Deficiency Payment Scheme (PDPS) and pilot of Private Procurement & Stockist Scheme (PPSS).

The PSS is actual procurement by government at MSP from the farmers during harvest period. This is nothing but the existing procurement operations for paddy and wheat. For only two commodities, government is spending about Rs.2 lakh crore (USD 27 million) every year on food subsidy. To expand it to all 23 crops is beyond the capacity of both central and state governments both in terms of finances and also logistical arrangements. 

Under the PDPS, farmers are paid the difference between MSP and the modal price of the market, without actual procurement. It is most efficient method, as it eliminates all logistic costs relating to procurement, storage and offloading. It is neutral to crops and geography. It can be operational for any crop anywhere even in remotest parts of India.

Under the Private Procurement Stockist Scheme (PPSS), the private players can procure farm produce at the state-mandated MSP during the notified period in select markets, for which they would be paid a service charge.

States are free to choose among three sub-schemes PSS, PDPS and PPSS. However, most suitable mechanism under open and free market scenario is PDPS as it doesn’t intervene in free market operations of market players. Historically, most of the agricultural commodity (except paddy and wheat) prices are determined by free play of market participants with negligible government intervention. Hence it is important that the government policy should not intervene in already perfectly working free market forces. 

The implementation of the PDPS is easy and feasible across the country, as all the necessary information for direct transfer of price deficiency payment like farmers identification, land records, bank accounts are collected under already fully functional PM-KISAN scheme. The model price of all the APMC markets is available under AGMARKNET. Only additional information needed is the quantity sold by each farmer, which can be estimated based on acreage data collected by state department of agriculture at the beginning of the season or actual submission of sale receipts. 

Even under ideal situations, the actual procurement at MSP cannot reach more than 20% of farmers, hence cannot be a solution to rising farmers’ incomes. The actual procurement was less than 5% of market arrivals for pulses and oilseeds and about 20-30 % farmers in case of paddy and wheat in 2019 crop season. Hence, in the long run only alternative is PDPS as its benefits can reach 100% of farmers.

The implementation of PDPS schemes is not dependent on the capacity of the government to procure through APMCs or any other agency, hence farmers fear of neglecting the APMC markets under new laws will be eased. 

By Mr. A Amarender Reddy, Principal economist, ICAR-Central research Institute for Dryland Agriculture, Hyderabad 

Email: amarender.reddy@icar.gov.in