With farmers’ agitations rising due to low prices of several agri-products, the government is desperately looking for ways to win them back, lest it proves costly in the upcoming Lok Sabha elections. The Centre’s announcement fixing MSPs at 50 per cent above costs (A2+FL) is viewed as a game-changer in wooing back the farming community. Several states have buffered the MSP increases with bonuses: Madhya Pradesh announced a bonus of Rs 265/quintal on wheat MSP (Rs 1,735/quintal) during the 2017-18 rabi season and Chhattisgarh gave a bonus of Rs 300/quintal on paddy MSP (Rs 1,750/quintal) during the current kharif season. Both states are due for elections in 2018. Madhya Pradesh went a step ahead in the last kharif when it tried price deficiency payments (Bhavantar Bhugtan Yojana [BBY]), where it compensated farmers of selected crops for the difference between the realised price and MSP. The scheme fizzled out because traders colluded, farmers suffered plummeting prices and despite concerted efforts, the state government could not compensate beyond one-fourth of the total production.
Maharashtra is the latest entrant in the race to appease farmers. In a controversial move, the Government of Maharashtra (GoM) has made buying at MSP mandatory in the state for traders. In case the order is not observed, the licence of the trader will be cancelled, a fine of Rs 50,000 imposed and he must serve a jail term of one year. Not surprisingly, the Maharashtra traders’ community is united against this decision and going on strike.
Chief Minister Devendra Fadnavis had proposed the same decision last year and implemented it for tur. He then withdrew it in response to farmers’ requests. It is important for Fadnavis and the country to understand the likely implications of such a decision. One can think of the following scenarios.
In the first scenario, let us assume that traders fall in line and buy everything at MSP or above. What if supply exceeds demand for some kharif products, which is likely to be the case for most pulses, oilseeds and coarse cereals? Market prices will tend to fall, possibly below MSPs, much like they are currently for most kharif crops. Where and how does the trader sell? Will the CM ensure that the high MSPs are translated into higher retail prices by not allowing any inward flow from neighbouring states? This would amount to creating a republic of its own with elevated price structures. In that case, the GoM may face the wrath of consumers who would be paying much higher prices than consumers in neighbouring states.
In scenario two, a private trader buys at MSP, unloads the produce at prevailing market prices that are below MSPs and incurs heavy losses. This one is a non-starter. No rational businessman would do that unless the government promises to compensate losses, akin to the BBY of Madhya Pradesh.
In the third scenario, Maharashtra’s neighbouring states like Karnataka, Madhya Pradesh and Gujarat are selling the same crops at prices below MSP (historically their prices have been below MSP). Maharashtra’s traders may move to the adjoining states and buy at market prices. In that case, the GoM becomes the buyer-of-last-resort, resulting in a de facto takeover of the wholesale trade. This would take us back to the socialist raj of 1973-74, when the Indira Gandhi government took over the wheat wholesale trade. But we need to remember that she had to give it up within a year as it led to massive chaos.
Is CM Fadnavis ready for such a chaos? Does the GoM have ample resources and storage to buy all that comes to market of all MSP crops? And then, where and when will it unload this stock and at what price? Already pulses’ stocks are burgeoning and market prices of most kharif pulses remain way below MSP (see graph). In such a scenario, farmers will be left in a lurch as traders will not be there to buy and the GoM may not have the reach to buy all the MSP crops. Clearly, the GoM’s decision is a losing move, both economically and politically. It may lose the trust and patience of both the farmers and traders.
The best way to deliver a better deal to farmers is to “get the markets right”: Treat farmers as businessmen and facilitate a conducive environment for them to flourish. Give them access to national markets. Reform archaic laws like the Essential Commodities Act (ECA) 1955 and APMC Act. The Atal Bihari Vajpayee government started marketing reforms by de-notifying many commodities from the ECA and issuing a Model APMC Act (2003). That work, however, remains unfinished and is waiting for the Modi government to take it to its logical conclusion.
Invite the private sector to build storage, assaying, grading, packing facilities at the back-end with farmer-producer-organisations (FPOs). Create competition for APMCs by facilitating private mandis. Freeze the commission of the commission agents. As for the market fee, possibly cap it at 2 per cent of the value of agri-produce being transacted for all commodities across the country.
Maharashtra’s Vashi market officially charges a commission of 8 per cent on fruits and vegetables, unofficially it goes even higher. This is scandalous and must stop. This will have to be done by the Centre in partnership with states, the way GST was done. Further, big agri-processors and organised retailers, including e-commerce players, should be invited to buy directly from FPOs without paying any market fee. In fact, the government should support their building back-end infrastructure. The Negotiable warehouse receipt system (NWRS) needs to be stepped up, as does futures’ trading. Export bans need to be banned and Minimum Export Price used judiciously. Overall, the implicit taxation of farmers needs to be phased out.
The MSP formula of 50 per cent over cost A2+FL is ill-advised. It ignores demand and supply, as well as the global price situation. It is doomed to fail. A better approach to help farmers will be to move through an income policy, a la the Telangana model, which will have the least distortions. It can subsume the input subsidies, setting input prices to be freely determined by the markets. Can Prime Minister Narendra Modi move in that direction? It will be good economics and good politics.