Analysis: Giving Options To Farmers, The Practical Way Out

Analysis: Giving Options To Farmers, The Practical Way Out

Today, besides rice and wheat, for other crops the MSP sets benchmarks in the market at times and hence can elevate prices even if supplies are good, thus leading to inflation that may not be justified due to market forces

Madan SabnavisUpdated: Friday, February 16, 2024, 11:11 PM IST
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Representative Pic | Abhilash Jacob/Pixabay

Agriculture is probably the most delicate subject when looking at economic policy in India. This is so because there are several conflicting stakeholders involved. At one end of the spectrum are the farmers who do the production of all goods and services in the sector and are on the lookout for the maximum possible return. At the other end is the consumer who wants to pay a fair price which is also the lowest one. And in between is the central bank which has to manage monetary policy which is driven by inflation targeting which in turn has little control over the direction of food prices.

It is against this background that one must look at the protests of the farmers closer to Delhi where the main demand is to have the Minimum Support Prices policy made into a law. It may be recollected that when the farm laws were introduced, only to be withdrawn, almost three years ago, the major concern was that with markets opening up the MSP would be withdrawn. Assurances were given that MSP would never be withdrawn. The demand now is that it be made into a law where prices of 23 commodities are covered.

How does the MSP work? Before the sowing starts in the two seasons of kharif and rabi, the Ministry of Agriculture announces the minimum support price that will be paid to the farmer for various crops. The idea is to provide a backstop facility in case prices crash at the time of harvest. There is economic rationale here. However, the government normally has procurement policies for rice and wheat where these stocks are linked to the Public Distribution Scheme. Today with the free-food scheme being guaranteed for the next five years, procuring rice and wheat is an imperative. However, for other crops there is no such compulsion and hence the MSP is at best an indicative price for the farmers. Farmers can decide on which crop to grow based on these prices, but cannot be sure that there will be a buyer in most cases. At times states do procure pulses and oilseeds through cooperatives, but this is more of an exception than rule.

Now by making this scheme a law it would mean that the government would have to keep increasing the prices of all crops and have provisions to procure the same if warranted. Today, besides rice and wheat, for other crops the MSP sets benchmarks in the market at times and hence can elevate prices even if supplies are good, thus leading to inflation that may not be justified due to market forces. In fact the MSPs are increased by 4-6% on an average based on a formula which looks at all costs and a margin on the same. It is unlikely that this will change.

The other demands of the farmers include increasing the number of days under NREGA to 200, raising the minimum wage to Rs 700/day, pensions for those above 60 years to Rs 10,000 per month and so on. Also making the MSP a law would mean that it would be mandatory to announce and procure all the crops which is not feasible. This would also translate to higher cost for the government which is trying to lower the deficit. Further, the threat of increasing inflation that is not linked with supply or demand conditions would distort commodity markets. The RBI will have a difficult time in viewing inflation and adjusting interest rates in case higher prices get embedded every year due to the MSP.

The major challenge to policy formulation in India especially agriculture is that once introduced it becomes very hard to withdraw any scheme or even consider a rollback. It is true that agriculture is in a hard spot. On one hand higher prices are not looked positively when inflation is high and there are trade embargoes applied which affect farmer incomes. Here the aim is to protect the consumer from higher prices. At the same time increasing MSPs has become an imperative to assuage the interests of the farmers.

Now the MSP was a tool to influence farmers to also alter their cropping pattern and hence bring about a diversified structure. However, as the cost of growing rice and wheat was the lowest relative to crops like pulses or oilseeds where there was also risk of crop failure due to uneven monsoon patterns, there was a tendency to grow more of these two crops. Rice and wheat along with sugarcane (which also has a mandatory procurement price for mills) use the maximum amount of water which has led to the water table levels coming down especially in the northern states. This is because selling to the FCI has become the first option for the farmers rather than the last recourse, which is what it was supposed to be. Also the farmers have not migrated to higher varieties of cereals because the existing structures worked well. Further, the fear of ban on exports was another deterrent for not moving up the value chain and settling for the average fair quality.

The issue is evidently complex but not without solution. The markets in all segments have opened up considerably but agriculture remains untouched mainly due to conflicting interests of various stakeholders. Opening up the markets is the only solution and providing options to farmers is the practical way out. By controlling prices, there is an inherent tendency to support either the consumer or farmers thus making the market process of price determination quite distorted. This ideology has to be sorted out at the government level.

The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal

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