Indian democracy has been at full play in reaction to the new farm laws. While the government hailed it as a historic decision — I tend to agree with that — the Opposition parties described the passing of these farm laws as “a dark day for farmers” and a “sell out to corporate sharks”. What amused me the most was how everyone’s heart was suddenly bleeding for the farmer.
I could, however, see that both sides of the political spectrum want farmers’ incomes to increase. The Opposition parties want to ensure that through higher and more effective MSP (minimum support prices), while the government is offering greater choices to farmers through markets, without demolishing the existing MSP system.
Having analysed the MSP business over decades, let me say clearly that the 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. This transition is about changing the pricing mix — how much of it should be state-supported and how much market-driven. The new laws are trying to increase the relative role of markets without dismantling the MSP system. Let me also say that, currently, no system is perfect, be it the one based on MSP or that led by the markets. But the MSP system is much more costly and inefficient, while the market-led system will be more sustainable provided we can “get the markets right”. Let me explain that in some detail.
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. A perusal of the MSP dominated system of rice and wheat shows that the stocks with the government are way above the buffer stock norms (see figure). The economic cost of procured rice comes to about Rs 37/kg and that of wheat is around Rs 27/kg. 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. No wonder, 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. The bottom line is that grain stocks with the FCI cannot be exported without a subsidy, which invites WTO’s objections. 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. We are simply postponing a financial crisis in the food management system. The FCI can reduce costs if it uses policy instruments like “put options”. But who cares for cost efficiency when arguments are put forward in the name of the poor?
Some scholars have even spoken of sugarcane pricing and milk pricing by co-operatives in the same vein as the MSP. Technically, that is not correct. 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. In the case of sugarcane, the government announces a “fair and remunerative price” (FRP) to be paid by sugar factories — Uttar Pradesh announces its own “state advised price” (SAP). Look at the mess we have created in the sugar sector. The sheer populism of SAP has resulted in cane arrears amounting to more than Rs 8,000 crore, with large surpluses of sugar that can’t be exported. This sector has, consequently, become globally non-competitive. Unless sugarcane pricing follows the C Rangarajan Committee’s recommendations — somewhat akin to milk pricing — the problems of the sugar sector will not go away.
That brings me to the most important commodity of Indian agriculture, milk, whose value is more than that of rice, wheat, and sugarcane combined. In the case of milk co-operatives, pricing is done by the company in consultation with milk federations, not by the government. It is more in the nature of a contract price. R S Sodhi, the managing director of the largest milk co-operative (GCMMF, AMUL) has said that milk does not have a MSP. It competes with private companies, be it Nestle, Hatsun or Schreiber Dynamix dairies. And, the milk sector has been growing at a rate two to three times higher than rice, wheat and sugarcane. Today, India is the largest producer of milk — 187 million tonnes annually — way ahead of the second-ranked US which produces around 100 million tonnes every year.
My reading is that in the next three to five years, hundreds and thousands of companies will be encouraged to build efficient supply lines somewhat on the lines of milk, as a result of these changes in farm laws. These supply lines — be it with farmers producer organisations (FPOs) or through aggregators — will, of course, be created in states where these companies find the right investment climate. Some will fail, but many will succeed. These companies will help raise productivity, similar to what has happened in the poultry sector. Milk and poultry don’t have MSP and farmers do not have to go through the mandi system paying high commissions, market fees and cess. The choice is ours: Do we want growth that is financially sustainable, or create a mess somewhat like what we have created in the case of rice, wheat, and sugar.
I must say also that the pricing system has its limits in raising farmers’ incomes. More sustainable solutions lie in augmenting productivity, diversifying to high-value crops, and shifting people out of agriculture to high productivity jobs elsewhere. But no one talked about these during these agitations.
Gulati is Infosys Chair Professor for Agriculture at ICRIER
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