Agriculture in India needs to get the markets right, in the first place. Only then can the raising of farmers’ incomes to a reasonable level become a reality. Across space or over time, farmers should be able to trade freely with certainty. If MSP were a panacea, we would not be having any conversation, in the first place, about doubling farmers’ income more than five decades on!
The fight in the farm bill around the Minimum Support Price (MSP) is quite misplaced. The lack of mention of it in the bill (now an act!) might seem like a major cock-up in this legislation. It is for this reason that it leaves the expectation about the fate of MSP hanging – to the extent that even a world bereft of MSP is being conceived as a possibility. If the National Food Security Act (NFSA) with a massive constituency of 800 million people is a reality, MSP with procurement from grain surplus states is its outgrowth. Unless the whole NFSA complex is in line to be dismantled, guessing around on MSP is basically a storm in a teacup! But politics is a battle of perception or, rather, similar to the concept of product differentiation in economics. A product is differentiated based on what the consumer believes, no matter how it is produced or what it contains. The government should have been pre-emptive enough to know the possible spin doctors on this.
For starters, there is absolutely nothing in the act about MSP, and in our view rightfully so. The farm act is all about expanding the span of markets for the farmers, giving them more options to sell. That it implies closing the government procurement options even for the mere 6-10 percent beneficiary farmers currently is an association fallacy at best. MSP is an instrument for absorbing the market risk of farmers with a marketable surplus to encourage farmers to adopt new technologies. There is no better way for risk mitigation than diversification of choice set.
Leaving aside the fiscal price tag, for MSP to become a legally binding system – as argued by few analysts – is a complete lack of understanding of the incentives that it engenders in relation to the social optimum. Can Punjab and Haryana raise India’s welfare by continuing with cereals ad infinitum?
Also, quasi-legal sanctity of the MSP system has been tried in cases, for example, sugarcane cultivation or in deficiency payment systems like in Madhya Pradesh. Are sugarcane farmers or farmers of Madhya Pradesh characterized by anomalous fate? In the former, thousands of crores of outstanding dues for farmers with sugar mills exist and the latter has been plagued by cases of inappropriate reference pricing and collusion to artificially inflate the MSP-farmer price wedge (the deficiency) as has been shown by Tomar and Narayanan (2020) in their research.
The fight for MSP exists in Punjab and Haryana for a reason. These comprise the states where the government is a big player lapping up as high as 80 percent of production through procurement (Figure 1). With the level of procurement that high, it engenders confluence of special interests – similar to what retention pricing did in the case of fertilizers. The interests of traders, farmers, arhatiyas, and state government (mandi tax that can then be funnelled into different subsidies) – all align regarding MSP with procurement.
Financing is also another reason for which MSP works in some states while it fails in others. Unlike in the direct government procurement where payment to the farmers is often delayed, ‘arhatiyas’ do “spot payments to farmers in the peak procurement season”. Indeed, Minimum Support Price (MSP) is Maximum Support Politics (MSP).
Our Prescription: Introduce Reward-Based Incentive or Socially Optimal Prices
The assured procurement policy was initially commenced in the late 1960s with the focus of increasing production of food grains (paddy and wheat). This policy was topped up with extensive input subsidies (energy, fertilizers, and credit). While it augmented the output and pushed India towards self-sufficiency, it did result in ecological and nutritional consequences. The same Punjab, where protests are raging against the current farm acts, once used to be a major pulse growing state. Our prescription is that MSP should be transformed to ‘Maximum Social Price’ to support crops based on their social value – reward pulses & coarse cereals, attempt risk factorization and at least penalize environmental blackguards, like rice, comparatively.
Farmers could be incentivized or rewarded based on the ecosystem implications of their choices. This could also mean India not having to fight tooth and nail for the MSP system in the WTO, which has a peace clause. The government does not have the capital for procurement of all types of perishable goods and the fiscal cost for procuring coarse cereals could be very large. Yet, these principles could be applied to crops, like pulses, that have played an important role in relative price increases in food. Agriculture in India needs to get the markets right, in the first place. Only then can the doubling/raising farmers’ incomes to a reasonable level become a reality.
Across space or over time, farmers should be able to trade freely with certainty. If MSP were a panacea, we would not be having any conversation, in the first place, about doubling farmers’ income more than five decades on!
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