Year after year, the Commission for Agriculture Cost and Prices (CACP) comes out with detailed analytical reports on price policy for major crops and support prices are declared by the government. The recommendations on price usually receive media attention but non-price recommendations, which are largely in the domain of reform process, are ignored. Due to a lack of political consensus, the government finds it difficult to implement non-price recommendations. So, Minimum Support Price (MSP) is used as an instrument to satisfy farmers.
The declaration of higher MSP may satisfy critical voices for the time being, but in due course media attention shifts to some other pressing issue. As a result, higher MSP remains only a paper tiger. In 2018-19, kharif and rabi MSPs for several crops were substantially hiked and farmers of paddy did benefit due to procurement. In the case of cotton, the prices remained higher than the MSP due to global factors.
While farm leaders demand that all farmers should receive MSP, the organisations handling procurement at the national level (FCI, Nafed, SFAC) are not enthusiastic about bringing more commodities under the ambit of procurement. In the case of wheat and rice, the procured stock is distributed under the PDS at a hefty cost to the government. The economic cost of FCI for wheat and rice in 2019-20 is Rs 25.06 and Rs 36.02 per kg, respectively, but the centre sells at Rs 2 and Rs 3 per kg. Thus, the Centre bears food subsidy of Rs 23.06 per kg on wheat and Rs 33.02 per kg on rice.
A similar dispensation for pulses and oilseeds procured by agencies (mainly Nafed and SFAC) is not available, and the stock is being carried for several years. When such stocks are sold in the open market, the agencies incur losses, which are to be reimbursed by the central government. Nafed incurred a loss of Rs 748.5 crore for groundnut pods procured in Kharif 2013. For chana procured in rabi 2014, Nafed’s loss was Rs 185 crore. By 2016, Nafed’s losses had mounted to Rs 1,083 crore. It was only in March 2018 that the government facilitated settlement of Nafed’s debt with banks.
Nafed and other agencies are sitting over 35 lakh tonnes of pulses procured over the last three years. While this stock will be helpful in containing price rises in case of deficient monsoons, a delay in the disposal of stock may impact the quality and will increase the economic cost. If losses on account of pulses and oilseeds procured in the last two years are not promptly reimbursed, Nafed may face a similar situation again.
At the state level, procurement agencies are worse off. Most of them are ill-equipped to handle even wheat, paddy and rice which they have been procuring for decades. In most states, paddy procured is handed over to rice mills and they deliver the rice to agencies over a 6-8-month period. Very few state agencies have an adequate number of quality control professionals required for the maintenance of stock. In states where a large quantity of wheat or rice is procured, several employees have been punished for quality deterioration, acceptance of the poor quality of rice, recycling, theft and fraud.
The substantial increase in MSP of kharif and rabi crops in 2018-19 has to be examined in this context. Without any reference to demand and supply, and global prices, the government announced MSP by giving 50 percent return over the paid out cost incurred by farmers. Thus, the MSP of kharif crops of Jowar and Bajra was increased by 42 percent and 37 percent, respectively. MSP of Safflower, a rabi crop, was increased by 20.6 percent but the market price is currently ruling at Rs 3,700-4,000 per quintal against the MSP of Rs 4,945. Any state agency procuring safflower at MSP would incur a huge loss.
Further, when the government holds large stock, the private trade is scared as it fears the government selling the stock at highly subsidised prices. The withdrawal of private trade further depresses the price in the open market.
At the height of the farm crisis last year, the government announced the Pradhan Mantri Annadata Aay Sanrakshan Abhiyan (PM-AASHA) which raised false hope as if the government would be able to secure MSP for all the 24 crops –7 cereals, 5 pulses, 8 oilseeds, raw cotton, jute, copra and dehusked coconut. The scheme was to have three components—Price Support Scheme (PSS), Price Deficiency Payment Scheme (PDPS) and Pilot of Private Procurement & Stockist Scheme (PPPS). PDPS and PPPS have remained only on paper and even PSS operations are limited to pulses and oilseeds, that too in some states only.
Those who understand commodity operations knew that it is not possible for any government to procure all the produce at MSP.
Ironically, the sugar industry which is required to pay the fair and remunerative price (fixed by the government), irrespective of the market price of sugar, is incurring huge losses causing delayed payment of sugarcane dues to farmers. This forces the government to come out with package after package for the sugar industry so that it can pay FRP to farmers. In the process, India produces excessive sugar and farmers in some states have to wait for more than a year to get paid. This is not all. India is facing some serious questioning in WTO for its policies on sugarcane.
In the last two years, several states have experimented with direct income support (Rythubandhu in Telangana and Kalia in Odisha) which prompted the centre to implement PM-Kisan on the eve of elections. It is not yet settled whether direct transfers can replace MSP for all crops or it should be paid to those farmers whose crops are not procured by the government. It is accepted by everyone that it is much easier to administer direct income support than physically procure all crops at MSP.
According to the Agricultural Policy Monitoring and Evaluation Report of OECD (2015), China provided Xinjiang cotton farmers a direct subsidy of CNY 2,000 ($323) per tonne from 2014/15. A pilot target price programme with a direct subsidy for soybean producers was introduced in 2014 in four northeast provinces of Heilongjiang, Jilin, Liaoning and Inner Mongolia.
Since India is always in election mode, similar reforms in India would require broad political consensus, in the absence of which, MSP would continue to be offered as a lollipop without seriously meaning to deliver fair price and income to farmers. The task is cut out for the new government.Siraj Hussain is a Visiting Senior Fellow at ICRIER. He retired as Union Agriculture Secretary.