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Don’t support minimum support prices

Legal MSP is an illogical, expensive and inefficient policy instrument

In this piece, we focus on one of the key demands of protesting farmers’ unions — a legal backing for minimum support prices. (File)

As we ring in the new year, we wish all the readers of this column and our farmer families a safe and happy new year, with greater prosperity and more productive and competitive agriculture that is environmentally sustainable and produces more nutritious food.

In this piece, we focus on one of the key demands of protesting farmers’ unions — a legal backing for minimum support prices (MSP). We estimate the reach and depth of MSP from the unit-level data reported by NSSO (77th round) in the Situation Assessment Survey (SAS) of agri-households (agri-HHs) for the agricultural year July 2018 to June 2019. The sample size of the SAS was 58,035 households during the first visit. The same households were surveyed in the second visit, but the sample dropped to 56,894 as some households could not be tracked. Based on this unit-level data set, just 8.8 per cent of agri-HHs sold any crop to government agencies at MSP. The value of that agri-produce is just 8 per cent of the total value of agriculture (crops plus livestock). This is the picture at the all-India level, and obviously, it differs widely across states ranging from MSP reaching less than one per cent in most of the north-eastern states to as high as 50 per cent in a state like Chhattisgarh (see graph).

Interestingly, the total number of operational holdings estimated in the country, based on this small sample of SAS was about 89 million and 93 million for agri-HHs. This is much lower than the number of operational holdings (146 million) reported in 2015-16. However, the total value of agri-produce estimated from the SAS sample data is only about Rs 10.1 trillion compared to what National Accounts give at Rs 37.3 trillion. This raises serious doubts about the coverage and true representativeness of this sample. Although the SAS states that their results should be read more in terms of percentages and not in absolute terms, their extrapolation of absolute total numbers is so vastly different from other sources that one is compelled to think and use those numbers to see what alternative set of numbers come up with respect to the reach and depth of MSP.

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If one uses the Census and National Accounts data, which are more reliable, the percentage of farmers benefiting from MSP shrinks to just 5.6 per cent and the value of agri-produce benefiting from the MSP regime comes down to a paltry 2.2 per cent. Whether one takes this as more authentic or the ones generated from the SAS unit-level data set as more credible, the fact remains that the reach of MSP, both in terms of agri-HHs or the value of agri-produce, is not more than 9 per cent. In fact, it can be much lower if one uses the aggregate data from the Census and National Accounts.

While traditionally, Punjab and Haryana farmers have benefitted most from the MSP regime due to a legacy of the Green Revolution, lately, procurement has spread to many other states, most notably in Chhattisgarh and Telangana for paddy, and Madhya Pradesh for wheat. Some scholars have lauded this as a success story of MSP reaching the small and marginal farmers, especially in a state like Chhattisgarh, where as per SAS data, almost 50 per cent of agri-HHs and 45 per cent of agri-produce benefited from MSP. But when we use the Census and National Accounts data, this percentage of farmers benefiting from MSP falls to 37 per cent, while the value of agri-produce benefiting from MSP falls to just 13.7 per cent. However, what is missed in this entire story of MSP reaching small and marginal farmers in states like Chhattisgarh is that most of these farmers also benefit from highly subsidised PDS. Nothing can be a more irrational and economically inefficient process than first buying paddy from small and marginal subsistence farmers at MSP, and then giving them back the same rice after incurring 40 per cent higher costs on top of MSP during the process of procurement, stocking and distribution.

It is much better to directly help small and marginal farmers with an income policy or through a diversification package towards high-value agriculture. That way, the PM-KISAN policy of giving Rs 6,000 into the accounts of agri-HHs is much more efficient and supportive of small and marginal farmers. It can be refined and scaled up, say by linking it with adopting farming practices that are environmentally benign such as reducing methane emissions and stubble burning in paddy fields.

What all these results suggest is the following: Even though MSPs are announced for 23 commodities, the price support essentially runs for wheat and rice and that too in selected states. This creates highly distorted incentive structures in favour of wheat and rice and along with highly subsidised (free) power and urea, it is leading to an environmental disaster in certain pockets of north-west India.

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One needs to understand that MSP distorts the basic logic of the supply-demand mechanism, slows down the process of diversification, and is economically a very expensive and inefficient policy instrument, besides leading to massive leakages and corruption. This cannot augment incomes of small and marginal farmers, who represent almost 87 per cent of the total farming community. With an average holding size of just 0.9 ha, unless farmers move rapidly towards high-value agriculture, there is not much scope to achieve better incomes for smallholders in an economically efficient and sustainable way. The government’s focus needs to be directed towards the development of efficient value chains, forming of commodity-specific FPOs, equipping them to assay, grade, and package their products, incentivise the private sector to invest in logistics, storage, cold chain, processing and so on. Till the time these value chains are scaled up, the government can help farmers through an income support policy on a per hectare basis, tilted towards small and marginal holders, which can be directly transferred to farmers’ accounts without distorting markets or cropping patterns.

This column first appeared in the print edition on January 3, 2022 under the title ‘The fallacy of MSP’. Gulati is Infosys Chair Professor for Agriculture and Roy is a Research Fellow at ICRIER

First published on: 03-01-2022 at 04:00:59 am
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