It may be worth noting that the 23 MSP crops constitute roughly 30 per cent of the value of agriculture.
Jan 10, 2025 13:45 IST First published on: Jan 10, 2025 at 07:19 IST
Let me start by saying that my heart bleeds when I see farmers agitating over prices for their produce. I have spent my entire professional life working for the betterment of agriculturists. But rational policymaking requires much more than compassion. It requires a better understanding of how the economy functions, especially the market economy. Having worked on the agriculture of various Asian and African countries, I can confidently say that legalising minimum support prices (MSPs) would be a folly — it would throw a spanner in the working of the economy. Making MSPs effective is different from making MSPs legal. Let me elaborate.
In a market economy, the price of any product is decided by the forces of demand and supply. Suppose the production of a commodity in any year is 100 units and its demand is 75 units. In such a situation, the price of that commodity would fall. With reduced prices, demand expands, supply shrinks, and finally, the market clears. If MSP is made legal and is high, creating a situation of supply exceeding demand by 25 units (100-75), no private player will come forward to offer a price lower than MSP as it would be illegal to do so. In that case, farmers would be saddled with these extra 25 units that no one is willing to buy at the declared MSP. The entire excess supply will become the responsibility of the government. How much the government can buy, and for how many commodities, and at how many places is an open question that needs serious thinking and analysis.
Some activists suggest price deficiency payments. Several cost estimates of such a scheme are being floated. The problem with such a scheme is that if MSP is declared legal, then there would be no real market price below MSP. Then the government becomes the open-ended buyer of all commodities for which MSPs are declared, which are 23 as on day. If one argues that MSP is not legal, and agri-markets do exist and price discovery is possible, but farmers need to be compensated for the difference between MSP and lower market prices as price deficiency payments to farmers, we are talking about a different policy — making MSP more of an income instrument. The downside of such a policy is that the moment traders know that the government will compensate the farmers by the difference in MSP and market prices, they are likely to push market prices even lower, and there is a high probability that farmers and traders will collude in showing market prices much lower than the MSP. That would make it very difficult to estimate the hit to the financial exchequer. The price deficiency mechanism was tried earnestly in Madhya Pradesh, and just after one season, the government had to give it up precisely because of this reason. If the government wants to make MSP more effective (not legal), it can create a stabilisation fund of about Rs 25,000 crore, especially focused on pulses and oilseeds of which India is a net importer.
It may be worth noting that the 23 MSP crops constitute roughly 30 per cent of the value of agriculture. Within these 23 crops, MSP is properly implemented in the case of rice and wheat, that too in a few states. The Centre’s latest Situation Assessment Survey revealed that not more than 10 per cent of farmers sold their produce at MSP. It may also be noted that this MSP policy is an offshoot of the acute grain deficit in the mid-1960s. It won’t be economically prudent if the same policy is applied when India is surplus in basic staples.
Now, let us turn to the non-MSP segment of agriculture which is facing free markets. During 2010-11 to 2022-23, for which we have the latest data, fishery has been growing at 8.2 per cent per annum, meat at 7.3 per cent, eggs at 6 per cent, milk at 5.3 per cent, and horticulture at 4.7 per cent per annum. None of these agri-commodities have MSP, and they are more perishable than wheat and rice. But wheat has grown at 2.5 per cent and paddy at 3.2 per cent over the same period. This clearly shows that market-based systems have performed much better than the government-controlled MSP regime for wheat and rice.
However, this does not mean that markets are perfect. They are often distorted by the government through export bans, stocking limits on private trade, suspension of futures and options at the drop of a hat, and so on. All this is done in the name of keeping agri-inflation low for consumers. So, there is an inherent consumer bias in the agri-price policy, which implicitly becomes anti-farmer. Amongst the G20 countries, as per OECD, India is the only country that has negative Producer Support Estimates (PSEs), meaning that India implicitly taxes its agriculture by suppressing market prices. What Indian farmers need is freer markets, building of agri-value chains — like the AMUL model in milk — where farmers can get 75 to 80 per cent of what consumer pays. Making MSP legal will be going backwards, which is not in line with the liberalisation of the economy.
Gulati is Distinguished Professor at ICRIER. Views are personal
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