Explained: In perspective, farm distress and the demand for guaranteed MSP

Guaranteed MSPs

As the name suggests, MSPs are the prices at which, on paper, the government promises to procure agricultural produce from farmers. At present, the government announces MSPs for 23 crops, but procurement happens only for a few among them. Also, procurement varies quite a lot across states.

While the government does announce MSPs every year, it is not required to do so by law. The compulsion to procure on MSP is political, not legal. But if there were to be a law backing the MSP regime, the government would lose its existing discretion in choosing not to procure.

A legal mandate for MSP would force the government to purchase all the produce that any farmer wants to sell at the declared MSP. It would also have to procure from all states, and all crops for which MSPs are announced.

Problem with this

India has had MSPs for several crops for several decades now, but that has not resolved the problem of agrarian distress. On the other hand, a guaranteed MSP can have quite a few unintended consequences that might make the attempted cure worse than the disease. A good example is from the United States, during the presidency of Jimmy Carter between 1977 and 1981.

To alleviate the economic condition of dairy farmers, Carter announced that the price of milk would go up by 6 cents per gallon every 6 months. But to maintain these prices, the Carter administration had to increase the demand for milk. It chose to do so by offering to buy as much cheese as anyone would sell to the government at a predesignated price. This was, in essence, a ‘guaranteed MSP’.

As the months and years rolled by, more and more cheese was produced and sold to the government. Dairy farmers were happy with higher milk prices, and kept increasing production far in excess of the real demand. Most of the milk went into making cheese, which was then sold to the government.

But the government did not know what to do with it. It ran out of space, and had to rent several caves to store the cheese. By 1981, Carter’s dairy support programme was costing American taxpayers $2 billion every year, while the government was stuck with mountains of unutilised cheese.

The administration of President Ronald Reagan who succeeded Carter stopped the automatic increases in prices, gave the cheese away for free, and paid dairy farmers to cut down on the production of milk.

In India, the percentage of people involved in agriculture is far higher, and they are far more economically distressed than any Western country. A legally mandated MSP regime is likely to be neither feasible nor sustainable in the long run. Already grain stocks lying with the government are more than twice its buffer requirement, and sometimes end up rotting.

Possible way forward

It seems logical that instead of bypassing the market by using MSPs, the government should make efforts to enable farmers to participate in the market. However, most Indian farmers have small and marginal landholdings, making them uneconomic. They are poor and indebted, and a large section among those who work in the fields are landless labourers.

The way forward is to ramp up investment in the agriculture sector. This means better irrigation facilities, easier access to credit, timely access to power, and ramping up warehouse capacity and extension services, including post-harvest marketing. The approach has to be to raise the farmers’ bargaining ability and choices before them.

At a fundamental level, the problem is there are just too many people involved in Indian agriculture for it to be truly remunerative. Agriculture accounts for just 17% of India’s GDP while employing 55% of its population. To a great extent, the solution to the economic distress of Indian farmers lies outside agriculture — in boosting India’s industrial and services sectors.

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These two sectors can potentially soak up the excess labour that is at present engaged in unremunerative farm activities. Rapid growth of industries and services for the next couple of decades could alleviate India’s farm distress. This, however, is not happening. Data show that manufacturing lost half its jobs between 2016 and 2019, even before the Covid-19 pandemic hit.

Post pandemic, there is a trend of more and more people re-joining agriculture.

In the short term, many economists argue that the best way to alleviate distress would be to provide direct cash transfers to the rural poor.