Minimum Support Prices Have Outlived Their Utility

Even as the government has called for a fifth round of talks, and the farmer protestors are bent on resuming their push to Delhi, the Minimum Support Price (MSP), remains the central issue.

 MSP was introduced at the time of the Green Revolution in the 1960s. It was in order to spur on the efforts of farmers in Punjab, parts of Haryana and Western Uttar Pradesh, specifically chosen for the purpose, because their lands were already well irrigated.

India’s food situation was in dire straits at the time, and the country was dependent on America providing wheat, rice, milk powder and the like under their PL-480 food aid programme. Since then, India has come a long way, despite a quadrupling of its population from 1947. It is not only food surplus now but is the world’s biggest exporter of rice among other things.

Over the years, it is farmers from these three states, some 6% of the total, numerically, ruled by a miniscule rich farmer nexus, that have been the principal beneficiaries of MSP.

It is this collection of farmers, that is now demanding even more benefits beyond the existing MSP, free water, electricity, nil taxation, regular increases in MSP rates, and other subsidies and grants from the government.

Of course, the world over, farming is a highly subsidised business, but in the developed countries there has been massive collectivisation of land holdings, mechanisation, modern scientific methods to produce high yields, and some 1-4% of their much smaller populations produce all the food for consumption and export.

In India, by way of depressing contrast, over 50% of the population, some 70 crore people, are engaged in agriculture, and still only contribute some 12-14% to the GDP. It is a highly inefficient sector even 75 years after independence. It is also very difficult politically to reform agriculture and push a majority of the rural population into urban areas for other, more gainful occupations.

The bulk of the crop purchased by the government under MSP still constitute wheat and paddy from semi-arid Punjab and environs. It still uses scarce canal and ground water as it did in the 1960s. Even though there are much better rain-fed areas that grow a surplus of both wheat and paddy today but the Punjab farmers want to corner most of the MSP.

This procurement is, in turn, used to service the public distribution system (PDS) for rations to poorer consumers at subsidised prices, as well as free rations to millions of the poorest.

The rest of these ‘cereal’ crops, if any is left over year to year, after the spoilage from exposure to the elements and rodents,(because of inadequate government storage facilities), is sold in the open market. It is sometimes exported too, particularly rice and wheat. Some of it is retained, as buffer food stocks. Other items like onions, produced mainly in Maharashtra, are also exported. Fruit exports include mangoes. Indian goats are much in demand in West Asia.

The debate on MSP has hotted up once again with a plethora of opinions being offered by a wide selection of people. The ongoing farmer agitation, led by those from Punjab, is picking up where the last episode left off two years ago. In the last encounter, the agitators, led by vested interests determined to maintain the status quo, refused to allow three farm laws from being implemented. These were designed to reform the sector to benefit the vast majority of agriculturists and increase farm income across the board. Emboldened by that success, the same elements are back with a long list of audacious demands.

These include pensions for some 50% of the Indian population engaged in this low output agriculture from the age of 60 and beyond. They are also asking for comprehensive farmer debt waivers. There is also a bizarre demand that India must walk out of the World Trade Organisation (WTO).

The MSP being asked for now must come with a legal guarantee. It is also a much more expensive MSP. The new demand is for implementation of an unrealistic pricing formula, based on suggestions made by the late Dr. MS Swaminathan, the father of the Indian Green Revolution. If implemented, the new MSP would shoot up the retail food prices by an estimated 30%. However, the government is keen to negotiate a veering away from the cultivation of wheat and paddy in Punjab.

The government is in no position to agree to raised MSP for wheat and paddy from Punjab with guaranteed offtake of all that the state can produce. If they do anything like that most other development initiatives will suffer great harm, inflation would run amuck, the fiscal deficit would soar.

It can however buy other crops at MSP in order to encourage a badly needed diversification. It will take time to ramp up in volume terms and may actually strengthen the economy.

Wheat and paddy at high MSP on the other hand, would land India into an internal debt trap worse than what the Chinese have imposed on various countries.

Since MSP has been retained as a political hot potato ever since it was introduced, it is time for it to do some good in terms of present day requirements.

Early efforts of the government to try and bring about a shift in MSP covered crops from just paddy and wheat towards pulses, maize and cotton have been swiftly rejected by the farmer unions, overwhelmingly from Punjab. But the government wants to enter into a fresh round of talks to nudge this objective forward.

The farm unions from Punjab bent on their wheat and paddy seem unconcerned about the imminent desertification of their state with the water table having gone down by over 25 meters already.

The Trojan Horse of 22 or 23 crop items on the protestor list does not reveal that nearly 70% of the MSP is expended on the procurement of just paddy and wheat from the original Green Revolution belt plus Madhya Pradesh now. This needs to change in favour of some of the other 21 crops on the list and procurement from several other states in addition.

Unfortunately, the government’s procurement system has failed to energise the cultivation of pulses so far. These are imported to make up for the shortfall in these staples, in three types of commonly consumed dal.  The Indian government also imports copious quantities of palm oil for example, and could save a lot of foreign exchange if it could catalyse higher Indian production.

A number of hypothetical calculations on the impact of the various demands are doing the rounds. The MSP as it exists have given rise to several market price distortions.

In some cases, and some crops, the market prices have been higher, implying that the small farmer, for example, may prefer to sell outside of the government procurement system. Likewise, some of the rich agitators too, if they agree to grow anything beyond wheat and paddy. In other instances, MSP is higher than prevailing market prices, involving a government procurement outgo if all the output is to be mopped up. But naturally, prices cannot be static, both domestically and internationally from season to season, year to year.

In the end, and under the circumstances, with the MSP historical precedents in situ, the government is on the right track to use this agitation as an opportunity to  try and incentivise reform. The agitators in turn must realise that their room to force their point of view on the government is actually quite limited.

(1,255 words)

February 21^st, 2024

For: Firstpost/News18.com

Gautam Mukherjee