Minimum help cost (MSP) has turn into a controversial situation in the ongoing farmers’ agitation, even although there is tiny basis for the misconception that the government is withdrawing this programme. The only explanation for apprehension is that whilst the government has assured the farmers that the MSP will not be withdrawn, historically, attempts have been produced to get rid of subsidies. The idea of MSP, although, should be revisited.
MSP is a misnomer mainly because the government methods in to buy rice and wheat consistently as component of the Public Distribution System. The PDS has been sidestepped partly below the DBT, which suggests that the ration shop may possibly not be expected in the extended run. In that case, what takes place to the foodgrains that are procured? The procurement programme of the FCI is an open-ended a single, which accepts fair high quality provided and does not halt purchases at any time. Therefore, there are excess stocks with the government, developing a different set of difficulties: locking up of capital, exposing the foodgrains to the threat of rot, and so forth. As of September 1, stocks of rice and wheat stood at 70 million tonnes against a buffer stock norm of about 41 million tonnes. On June 1, stocks have been 83 million tonnes against a norm of 21 million tonnes.
In the case of other items, there is restricted procurement at MSP as the government lacks the structures to procure, shop and dispose of pulses and oilseeds. As of December 12, about 155,000 tonnes of pulses and oilseeds have been procured—a pretty modest proportion of total production. For Kharif 2019, the total production was about 23-24 million tonnes. Further, procurement is also area-particular and significantly less broad-primarily based as in the case of wheat and rice. The MSP, therefore, is more of a benchmark cost announced by the government and may possibly not be successful most of the time outdoors of the PDS items.
The query then is, ought to we have an MSP-primarily based procurement method? The argument for possessing MSP is that it protects the interests of farmers and guarantees that their incomes are regularised. As a considerable proportion of the labour force, involving 50-60, is employed in farms, this requirement is crucial. The MSP enables farmers to pick the crop to cultivate at the time of sowing, recognizing properly that at the time of harvest, in case there is a fall in rates, the government will be there to purchase their generate. Just like how the government protects SMEs with particular incentives, farmers also can claim their share of help. However, for this to work successfully, the guarantee of MSP has to be backed with a procurement ecosystem.
Are there arguments against this scheme? First, the MSP has turn into the initial solution rather than the final resort for farmers. Second, this has led to farmers opting to develop rice and wheat in bigger quantities as a corollary. Such a improvement is politically acceptable as governments have constantly highlighted record foodgrain production as an achievement. One can in no way recollect higher soybean or mustard production becoming highlighted, as opposed to cereals, specifically, rice and wheat. This has led to neglect for other crops, which have no surety of back-to-back procurement. Further, there is a tendency to develop an typical high quality exactly where the cost is assured, and not increase the high quality.
Third, rice and wheat cultivation (along with sugarcane) has led to a reduction in water table level in Punjab, UP and Haryana. It has also place stress on irrigation, as farmers have a tendency to overdraw subsidised water and electrical energy. This has developed skewness in other regions as state budgets have to bear the price. Last, a continuous raise in MSP, driven by a formula, straight adds to inflation as the marketplace method is not permitted to operate with rates becoming guided in a single path.
At an ideological level, an exciting conundrum comes to the forefront. There is politics involved as successive governments work to placate farmer groups. Due to the existence of such stress groups, the MSP programme has turn into a shibboleth that can’t be touched. On the other side, as households have no lobby groups, there is no representation at the policy level. When fuel subsidy was removed, and the middle class paid more for its LPG and kerosene, there was no objection. When the fixed revenue earners see their incomes becoming denuded by a continuous lowering of interest prices, there is no lobbying for their interests. In such a case are we generating also significantly noise on this situation due to the political undertones?
The farmer agitation has been taken to absurd levels, with the imbroglio now reaching the courts. For decades, it has been argued that the APMC laws should be repealed as the arhatiyas are exploitative. They give farmers reduced rates and add intermediation charges to escalate rates for the customer. Now, as the government has opened the door for an option, APMC is becoming lauded as a pro-farmer method. It is also ironic that states which have in no way applied the mandi tax collections to produce viable infrastructure for farmers are now saying that promoting outdoors mandis without the need of the taxes will deprive them of funds to make agri infrastructure. The counter-arguments provided by the farmer lobbies do not sound convincing either.
There is a pressing requirement to have a really serious debate on whether or not India ought to retain the MSP idea. The government has effectively launched the Kisan money transfer scheme, which is the correct way to support farmers without the need of distorting rates via faulty incentives that not only skew the cropping patterns but also come in the way of commercialisation of agriculture. It has also developed significant behemoths for handling foodgrains without the need of a method for disposal of stocks. Such policies have, at the finish of the day, led to larger rates for shoppers.
The government is working to deepen the commodity derivatives market—a replica of MSP method. Farmers, via the FPOs, ought to be nudged to the exchanges to hedge their threat and move more than to a diversified crop base. The exchanges, like NCDEX, ought to be applied for promoting the generate with the government bearing the price or premium. This will reduced the inefficiencies in the worth chain and minimize the distortions in the marketplace. The mandi or any region outdoors, as per the new law, can be the point of sale with cost hedging becoming completed on the exchange.
There is merit in dismantling the MSP method, which has turn into more of a political announcement, and ideally ought to not play a part in the functioning of economics. This may possibly be the correct time to start off the debate.
The author is Chief economist, CARE Ratings. Author of “Hits and Misses: The Indian Banking Story”. Views are private