The MSP issue has always been contentious. Initially, the idea was to have such a scheme because the government needed to distribute rice and wheat under the PDS or public distribution system, but this spread to other crops too where there was no backend procurement. These prices were indicative at best.
Over time, a few developments have taken place. First, the support price, which was to be the last recourse, became the first choice for farmers. Second, as the MSP was an average fair quality, many farmers automatically chose this standard and did not migrate to higher value qualities, as there was no such backstop provided. Third, farmers ended up producing more rice and wheat because of the procurement, which meant that crop diversification was not favoured, even when there were cost advantages. Fourth, the MSPs for crops which were not procured became benchmarks in the market and hence even when there were, say, higher supplies, prices did not come down in case MSPs increased substantially, as has been the case with pulses and oilseeds.
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Fifth, food inflation will always exist, as MSPs have been increased every year by an average of 2-6% for crops. This would not be a concern under normal conditions. But the RBI is targeting 4% inflation, which has been pressurised due to food inflation. It will always tend to be a threat, even if production is normal. Sixth, as a result of this scheme, real price discovery never occurs, as this extraneous factor is always at play. The last unintended fall-out is that it is hard to bring about any reforms in this sector. In fact, several progressive developments have gotten thwarted on the marketing side.
Also Read Evaluating Mintzberg’s 10 schools of thoughts for strategy formulation Understanding the four Vs of operations management – volume, variety, variation and visibility Inside track by Coomi Kapoor: Priyanka hesitates The economic future The MSP is based on a cost-plus formula, where the CACP takes a call based on predefined ways of defining costs. Post the 1991 reforms, there has been no other sector in the country which is as regulated as agriculture. The reason is not hard to guess. While the ministry of agriculture works to improve the income of farmers, the ministry of consumer affairs has to ensure that the consumer does not pay more than a fair price, which is quite a subjective concept. This then permeates to other areas such as foreign trade as well as the domestic trading chain, which creates anomalies. When there are shortages, there are embargoes on exports, as was seen in case of wheat, which militated against farmers. At times when there are shortages, there are open market sales, which not just lowers retail prices but also mandi prices. Further, putting stock limits on holdings at the retail and wholesale levels distorts the picture further, as traders are impeded. All crops are grown annually and have to be stored by some entity to be made available through the year. But traders run the risk of being found guilty when prices rise.
There is evidently a need for a significant overhaul, as small changes have not had much of an impact. First, the cooperative movement needs to be encouraged so that a self-service model is built. The milk story is a stellar example of how success was attained by including all farmers. It has delivered quality, quantity, and price changes unobtrusively. Second, there is a case for making agriculture a state subject. Presently, there are excessive subsidies which are given as handouts, distorting the incentive structure at the end of production. The states and the Centre often compete here, and the way out is for states to get into the act of running agriculture. This has the potential to provide incomes to farmers and will also allow the market system work. Third, the entire process of ‘free food’ should be outsourced to states. They should procure it and get compensation from the Centre where it is done from the closest markets. This will save a lot on logistics and handling costs.
Fourth, the derivative markets in commodities where NCDEX is a frontrunner, followed by MCX, should be used to replace MSP. An option gives the right but not the obligation for farmers to go with the price they have contracted in return for a premium that is paid. The government can only subsidise the option premium. If the price is higher, the farmer sells on the exchange. Delivery need not be taken or given, but the price risk can be hedged. The Farmer Producer Organisations can be entrusted with the task of representing the farmers on the exchanges. Sebi, along with the exchanges, has already done a lot here, and this needs to be taken to a logical end. Lastly, contract farming and corporate farming having enabling frameworks with checks are also essential to transform agriculture. This has worked very well in countries like Brazil, Mexico, Ghana, Turkey, and China, besides many smaller agri-based economies.
Some baby steps have been taken in this regard, like the setting up of a spot market called eNAM. Model APMC laws have been passed by some states to open up sales. This was all part of the farm laws introduced but withdrawn under protest. We really need to ask a broader question on whether we really want a strong, independent and resilient farming structure where farmers at all levels and not just the larger ones have access to a high-income-sustained living. There is a need for change and this is the right time.
Madan Sabnavis, Chief economist, Bank of Baroda
Views are personal
The MSP issue has always been contentious. Initially, the idea was to have such a scheme because the government needed to distribute rice and wheat under the PDS or public distribution system, but this spread to other crops too where there was no backend procurement. These prices were indicative at best.
Over time, a few developments have taken place. First, the support price, which was to be the last recourse, became the first choice for farmers. Second, as the MSP was an average fair quality, many farmers automatically chose this standard and did not migrate to higher value qualities, as there was no such backstop provided. Third, farmers ended up producing more rice and wheat because of the procurement, which meant that crop diversification was not favoured, even when there were cost advantages. Fourth, the MSPs for crops which were not procured became benchmarks in the market and hence even when there were, say, higher supplies, prices did not come down in case MSPs increased substantially, as has been the case with pulses and oilseeds.
Fifth, food inflation will always exist, as MSPs have been increased every year by an average of 2-6% for crops. This would not be a concern under normal conditions. But the RBI is targeting 4% inflation, which has been pressurised due to food inflation. It will always tend to be a threat, even if production is normal. Sixth, as a result of this scheme, real price discovery never occurs, as this extraneous factor is always at play. The last unintended fall-out is that it is hard to bring about any reforms in this sector. In fact, several progressive developments have gotten thwarted on the marketing side.
The MSP is based on a cost-plus formula, where the CACP takes a call based on predefined ways of defining costs. Post the 1991 reforms, there has been no other sector in the country which is as regulated as agriculture. The reason is not hard to guess. While the ministry of agriculture works to improve the income of farmers, the ministry of consumer affairs has to ensure that the consumer does not pay more than a fair price, which is quite a subjective concept. This then permeates to other areas such as foreign trade as well as the domestic trading chain, which creates anomalies. When there are shortages, there are embargoes on exports, as was seen in case of wheat, which militated against farmers. At times when there are shortages, there are open market sales, which not just lowers retail prices but also mandi prices. Further, putting stock limits on holdings at the retail and wholesale levels distorts the picture further, as traders are impeded. All crops are grown annually and have to be stored by some entity to be made available through the year. But traders run the risk of being found guilty when prices rise.
There is evidently a need for a significant overhaul, as small changes have not had much of an impact. First, the cooperative movement needs to be encouraged so that a self-service model is built. The milk story is a stellar example of how success was attained by including all farmers. It has delivered quality, quantity, and price changes unobtrusively. Second, there is a case for making agriculture a state subject. Presently, there are excessive subsidies which are given as handouts, distorting the incentive structure at the end of production. The states and the Centre often compete here, and the way out is for states to get into the act of running agriculture. This has the potential to provide incomes to farmers and will also allow the market system work. Third, the entire process of ‘free food’ should be outsourced to states. They should procure it and get compensation from the Centre where it is done from the closest markets. This will save a lot on logistics and handling costs.
Fourth, the derivative markets in commodities where NCDEX is a frontrunner, followed by MCX, should be used to replace MSP. An option gives the right but not the obligation for farmers to go with the price they have contracted in return for a premium that is paid. The government can only subsidise the option premium. If the price is higher, the farmer sells on the exchange. Delivery need not be taken or given, but the price risk can be hedged. The Farmer Producer Organisations can be entrusted with the task of representing the farmers on the exchanges. Sebi, along with the exchanges, has already done a lot here, and this needs to be taken to a logical end. Lastly, contract farming and corporate farming having enabling frameworks with checks are also essential to transform agriculture. This has worked very well in countries like Brazil, Mexico, Ghana, Turkey, and China, besides many smaller agri-based economies.
Some baby steps have been taken in this regard, like the setting up of a spot market called eNAM. Model APMC laws have been passed by some states to open up sales. This was all part of the farm laws introduced but withdrawn under protest. We really need to ask a broader question on whether we really want a strong, independent and resilient farming structure where farmers at all levels and not just the larger ones have access to a high-income-sustained living. There is a need for change and this is the right time.
Madan Sabnavis, Chief economist, Bank of Baroda
Views are personal
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