MSP can be legalised, but at crippling cost to economy, environment

India’s grain basket is heavily skewed in favour of paddy and wheat, demand for which is driven by one of the largest free/subsidised food programmes in the world

Tractors and trucks laden with thousands of farmers have been stopped by the police at various points on the roads from Punjab and Haryana leading to New Delhi, reminiscent of the protests of 2020-21 that dragged on for a year.

This time, the farmers are on a march to demand, among other things, that a law be enacted to guarantee minimum support prices for all crops. A promise to consider the request was made by Prime Minister Narendra Modi during the last round of negotiations and a committee was set up to look into the issue in 2022.

What does a legal guarantee of MSP mean? It means that anyone paying less than the price set by the government for crops could be criminally charged. Currently, there is an MSP for 23 crops. However, the highest procurement by the government is of wheat and rice.

According to experts, if MSP is legally guaranteed, the government will have to pay it regardless of supply and demand dynamics. At the moment, about 60 percent of the total field crop production in India comes from wheat and paddy.

A Crisil analysis for Moneycontrol showed that for the kharif 2022 season and the rabi 2023 season, 41 percent of the paddy and 24 percent of the wheat produced during the year was procured by the government.

Richest farmers are protesting

Mustard was the next most procured crop at 9 percent, while eight crops did not need procurement at MSP because their marker prices were higher. For the remaining five crops, procurement was less than 3 percent of production.

Crisil’s analysis tracked 16 of the 23 crops for which there is MSP and found that the working capital required for procuring them would be about Rs 6 lakh crore. The real cost for the government would be the difference between MSP and market prices, which works out to about Rs 21,000 crore for the year, based on prices in 2022-23.

Even as agriculture has become a big battleground globally, in India, at the heart of the discontent is what farmers say are issues such as income uncertainty, high input costs, and lower margins.

People can live without mobile phones, tablets, laptops and TVs, but not without food and farmers, say proponents of farmer rights. To be sure, there are no disagreements there.

But, as Ashok Gulati, one of India’s foremost agricultural economists, explains, the lot of farmers that are protesting are perhaps some of the richest in the country. He said making MSP legally guaranteed will distort market dynamics and will be inflationary, adding 25-30 percent to crop prices, besides being fiscally irresponsible and an administrative nightmare.

Is the farmer right?

Notably,  a majority of the farmers participating in the protests are from Punjab. There are hardly any farmers from Maharashtra, eastern Uttar Pradesh, Madhya Pradesh, and the northeast.

Apart from a legal guarantee for MSP, the demands of farmers include implementation of the Swaminathan Commission’s recommendations; pensions for farmers and farm labourers; farm debt waivers; withdrawal of police cases against farmers; justice for the victim of the Lakhimpur Kheri violence; withdrawal from the World Trade Organization, and compensation for the families of farmers who died in previous protests.

The most contentious of these demands, which will have long-term ramifications for India’s development trajectory, is legalising MSP.

According to Gulati, former chairman of the Commission for Agricultural Costs and Prices, which advises the government on food supplies and pricing policies, the farmers in Punjab are the most prosperous – almost all the farming in the state is irrigated. They have enjoyed free power, free or highly subsidised fertiliser for several decades and they have had assured procurement of wheat and paddy by the government.

So much so, Gulati explains, that paddy and wheat is hauled from eastern Uttar Pradesh and Bihar to be sold in Punjab. The market prices in eastern UP and Bihar are 15-25 percent lower than the MSP and there is hardly any procurement by government agencies in these states.

Punjab was the centre of India’s Green Revolution in the 1960s and 1970s, which heralded food security in the country through the use of high-yielding seeds, irrigation facilities and fertilisers. India’s policies of providing assured prices for food grains, or MSP, go back to the 1970s and Punjab has been one of the biggest beneficiaries of this push.

The MSP policy was framed when there was tremendous scarcity of food – the government had to assure incomes and incentives for farmers to grow crops. Over the years, MSP has been institutionalised, but procurement is concentrated in a few states including Punjab, Haryana, Madhya Pradesh, Chhattisgarh, Telangana and Uttar Pradesh. Farmers in other states do not get MSP.

The farmers want India to adopt the MS Swaminathan formula, which was recommended in 2006 and was rejected by the Manmohan Singh government at the time. The then United Progressive Alliance government, responding to a question in the Rajya Sabha on the Swaminathan Commission’s recommendation for remunerative prices, noted that “prescribing an increase of at least 50 percent on cost may distort the market. A mechanical linkage between MSP and cost of production may be counter-productive in some cases.”

Is the formula doable?

The MS Swaminathan formula for MSP is C2+50.

C2 refers to the comprehensive cost incurred by the farmer – it includes the cost of machinery, electricity, and seeds. It also accounts for family labour, wages and time spent on the farm as a cost, and working capital costs such as land rent and infrastructure the farmer might have leased/owned/rented such as grain storage facilities. In addition to C2, the government will pay 50 percent extra.

The government currently spends about Rs 1.64 lakh crore (allocated for FY25) on fertiliser subsidy, about Rs 2 lakh crore on food subsidy, about Rs 2 lakh crore on power subsidy, about Rs 85,000 crore on MGNREGA (the rural job guarantee scheme) and Rs 60,000 crore on the Pradhan Mantri Kisan Samman Nidhi, under which farmers get income support of Rs 6,000 annually.

“Adopting the formula will take the cost of crops up by 25-30 percent,” Gulati said. “The way the formula is being interpreted by the farmer lobby – our MSP should go up by 25-30 percent plus a profit margin of 50%. Which industry gives a profit margin of 50 percent? You are subsidising to create poison. Paddy is one of the reasons for rising pollution.”

Time for a rethink?

India’s grain basket is heavily skewed in favour of paddy and wheat, demand for which is driven by one of the largest free/subsidised food programmes in the world. India gives free or subsidised wheat and rice to almost 800 million people. The scheme invariably incentivises greater emphasis on the production of wheat and rice.

Pushan Sharma, director of research at Crisil, said MSP for all crops could lead to farmers moving to crops other than paddy and wheat. But he added that some crop prices may rise if mandi rates are much lower than MSP.

Gulati suggested cash tokens for specified commodities rather than distribution of food grains.

“Let the people decide what they want to eat. Someone might want to spend on eggs and vegetables, while another on wheat and rice,” he said.

Gulati, bureaucrats and free-market proponents told Moneycontrol the government should look beyond MSP.

Gulati said that sectors within agriculture that are out of the purview of MSP have fared better than MSP crops.

“The fastest-growing sector in Indian agriculture is poultry. For the past few years, it has grown at 8-9 percent. The next fastest-growing sector is fisheries at 7-8 percent. The dairy sector is growing at 5-6 percent. All of these sectors do not have MSP,” said Gulati.

Where are profits higher – one hectare of rice or one hectare of fruit? India could learn some lessons from the Netherlands, which is 1.26 percent of India’s size but has higher agricultural exports. Its focus is on premium products like vegetables, flowers, and fruits, and investing in cold chains and technology.

Three years ago, the Modi government announced its decision not to go ahead with the farm laws that would have allowed farmers to sell their produce outside the Agriculture Produce Market Committees. The trade of farm produce would have been free of the mandi tax imposed by state governments, farmers could have taken up contract farming and marketed their produce freely, and the Essential Commodities Amendment Act would have freed food grains, pulses, edible oils and onions for free trade except in crisis situations.

Parliamentary elections are a few months away and opposition parties are latching on to the latest farmer movement. Rahul Gandhi of the Congress party has said he will make MSP a legal guarantee. Arvind Kejriwal of the Aam Aadmi Party has also come out in support of the farmers.

In all the din, the voice of the marginal farmer is getting lost.