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Minimum Support Price Farm Bills

Search 3rd December, 2020 Spotlight News Analysis here: http://www.newsonair.com/Main_Audio_Bulletins_Search.aspx    

Topic: General Studies 2, 3:

• Public Distribution System- objectives, functioning, limitations, revamping; issues of buffer stocks and food security
• Government policies and interventions for development in various sectors and issues arising out of their design and implementation

What is Minimum Support Price (MSP)?

• MSP is the price set by the government to purchase crops from the farmers, whatever may be the market price for the crops.
• MSP assures farmers agricultural income besides providing a clear price signal to the market
• The major objectives are to support the farmers from distress sales and to procure food grains for public distribution. 
• The MSP is an assurance (not legal binding) by the government to the farmers that it will buy at this assured price if the market prices go below it.

MSP and the Changed Situation of Agriculture Sector

• The MSP regime was the creation of the era of scarcity in the mid-1960s
• Indian agriculture has, since then, turned the corner from scarcity to surplus. 
• The policy instruments of dealing with shortages are different from those dealing with surpluses
• In a surplus economy, unless we allow a greater role for markets and make agriculture demand-driven, the MSP route can spell financial disaster.
•  The new laws are trying to increase the relative role of markets without dismantling the MSP system.

Criticism of MSP System

• Distorted Procurement: MSPs pertain primarily to paddy and wheat in selected states — in recent years, the government has also been buying some amounts of pulses, oilseeds and cotton occasionally. 
• Buffer exceeding Limits: Due to MSP dominated system of rice and wheat, the stocks with the government are way above the buffer stock norms (see figure).
• High Cost of Procurement: The economic cost of procured rice comes to about Rs 37/kg and that of wheat is around Rs 27/kg. 
• High Wages in FCI: The CTC (cost to company) of departmental labour of the Food Corporation of India is six to eight times higher than contract labour in the market. 
• As a result, market prices of rice and wheat are much lower than the economic cost incurred by the FCI. In Bihar’s rural areas, for example, one can easily get rice in the retail market at Rs 23-25/kg.
• Export Inefficiency: The bottom line is that grain stocks with the FCI cannot be exported without a subsidy, which invites WTO’s objections.
• Food Subsidy Bill: The real bill of food subsidy is going through the roof but that is not reflected in the Central budget as the FCI is asked to borrow more and more. The FCI’s burden is touching Rs 3 lakh crore.

What is the farmer’s fear with regard to MSP?

• The core demand of farmer groups protesting is to safeguard the mechanism of MSP which they fear will be weakened by new farm bills. They are demanding for a legal right to MSP
• Without doubt, MSPs would continue to survive on paper as the government will have to procure to maintain a minimum buffer stock. However, many policy signals point to a strategic design to weaken the MSPs
  • MSPs are rising at a far slower rate over the past five to six years than in the past
  • The government has not yet agreed to fix MSPs at 50% above the C2 cost of production leading to price loss of ₹200 to ₹500 per quintal in many crops
  • Recommendation of CACP to stop open-ended procurement of food grains
• In Punjab, Haryana and western Uttar Pradesh, most crop sales are at the MSP through procurement centres including the mandis.
• If mandis weaken and private markets do not sufficiently replace them, they fear that the void would be filled by unscrupulous and unregulated traders. 

What is government’s contention?

• The government claims that the Acts will only increase options for farmers in the output markets, that the MSP-procurement system will continue, and that there is absolutely no plan to dismantle the system. 
• To support its claims, the government points to the fact that there is absolutely no mention of either MSP or procurement in the Acts.
• It is true that a large-scale public procurement of paddy is going on in Punjab as the protests are raging, thus assuaging the fears of farmers in the region.

Why are farmers primarily from Punjab & Haryana are protesting vociferously?

• The Public Distribution System (PDS) is the lifeline in these States. Farmers in Punjab and Haryana are heavily dependent on public procurement and assured price through MSP. 
• This is far greater than farmers in any other State. 
• Nearly 88% of the paddy production and 70% of the wheat production in Punjab and Haryana (in 2017-18 and 2018-19) has been absorbed through public procurement.
• In contrast, in the other major paddy States such as Andhra Pradesh, Telangana, Odisha and Uttar Pradesh, only 44% of the rice production is procured by public agencies. 
• In the case of wheat, this percentage is even lower. In the major wheat States of Madhya Pradesh and Uttar Pradesh, only a quarter (23%) of the production is procured by public agencies
• This clearly shows the heavy dependence of farmers in Punjab and Haryana on MSP and the public procurement system. Therefore, any disruption to the system, real or perceived, will cause a major upheaval

What are Government’s obligation with regard to Food Security of Nation?

• Obligation under NFSA: If farmers of Punjab and Haryana need the procurement system, the government needs it even more. This is because of its obligations under the PDS and the National Food Security Act (NFSA) that is a legal and rights-based entitlement.
• Large Number of people to be supported by PDS: There are nearly 80 crore NFSA beneficiaries and an additional eight crore migrants who need to be supported under the PDS. The government needs an uninterrupted supply of grain, particularly from these two States, to maintain the PDS. 
• Procurement is needed to supply PDS: In the last three years, nearly 40% of the total paddy production in the country (45 million tons) and 32% of wheat production (34 million tons) has been procured by public agencies to supply the PDS.
• Impact of Pandemic: This year, due to the onset of the novel coronavirus pandemic and the migrant crisis, the government has earmarked much larger quantities for public distribution — about 58 million tons of rice and 37 million tons of wheat. This translates into nearly half of the rice production (49%) and 35% of the wheat production in the country.
• Open Market Procurement is not feasible: Due to Pandemic, government needs to procure a huge quantum of grains than in previous years as the government cannot afford to go to the open market. That is a sure recipe for disaster as prices will skyrocket, and with the stock restrictions gone under the recent Essential Commodities Act Amendment, there is a possibility of large-scale hoarding too.

Why these States matter for government?

• If the government intends to procure such huge quantities of grains, then it needs to turn to these two States, because it is these States that have always been in the forefront in supplying grains to procurement agencies. 
• Nearly 35% of the rice and 62% of the wheat procured in the last three years has been from these States. Also, nearly 50% of the total coarse grains came from these two States. 
• Thus, the government has little option but to continue its procurement from these States in the foreseeable future. Even after the COVID-19 situation improves and the migrant crisis abates, the obligations under the NFSA will continue.

Way Ahead

• Engage with Protestors: It is clear that dismantling the procurement system is neither in the interests of farmers nor the government. Therefore, it is imperative that the government reaches out to the farmer groups and assures them of the indispensability of MSP-procurement system. Discussions between the government and the farmers can be structured using a broad framework based on two focus points.
  • First, India needs an increase in the density of mandis, expansion of investment in mandi infrastructure and a spread of the MSP system to more regions and crops. 
  • Second, we need not just more mandis, but also better mandis. APMCs need internal reform to ease the entry of new players, reduce trader collusion and link them up with national e-trading platforms
  • The introduction of unified national licences for traders and a single point levy of market fees are also steps in the right direction.
• Diversify Procurement: The government has to diversify its procurement away from two States of Punjab & Haryana
• Build Consensus: The severe trust deficit that resulted from the way the Farm Bills have been rushed through needs to be addressed by adopting a conciliatory approach towards farmers and the States.

Connecting the dots:

1. Will the dismantling of APMC monopoly actually lead to these mandis becoming redundant? Will it result in corporate agri-businesses establishing direct connection with farmers and eliminating market intermediaries? Discuss. 
2. Corporatisation of agriculture