MSP has outlived its utility. Give India’s farmers a new deal

Adopting a more liberal MSP formula or providing a legal guarantee to the MSP would not work. Farmers’ desperate situation calls for a fundamentally different policy solution.

The farmers of Punjab, Haryana, and western Uttar Pradesh have benefited the most from the minimum support price (MSP) system. A maximum proportion of their principal crops — wheat and rice — have been purchased under the system.

The farmers of the rest of India, barring in a few states for one or two crops, have not got the benefits of the MSP.

It is ironic that the farmers of Punjab and Haryana, who have benefitted the most from the MSP system, are agitating for a legally guaranteed MSP while all other farmers are quiet.

What explains this conundrum?

Is the MSP system still good for providing remunerative prices/incomes to farmers?

Will a legally guaranteed MSP system support work?

Is there a better alternative?

MSP system insured green revolution

Until the mid-1960s, the production of food crops, most tellingly wheat, was severely in the deficit, forcing India to remain excessively dependent on imports. Recall the humiliating PL-480 wheat supplies from the United States forcing then Prime Minister Lal Bahadur Shastri to plead with people to sacrifice a meal once a week.

It was the same Shastri who established the MSP system and the Food Corporation of India (FCI) in 1965 to buy cereal crops if the market prices fell below the MSP. This system bankrolled the green revolution in India assuring farmers to undertake the cultivation of new high-yielding dwarf varieties of wheat using chemical fertilisers and irrigation.

Wheat production took off in the second half of the 1960s. Soon the cultivation of rice joined the party, and farmers’ incomes increased. Punjab became one of the richest states in India.

India became aatmnirbhar(self-reliant) in cereals. According to government reports, hunger deaths in India are a thing of the distant past. Over the decades India has turned into an exporter of cereals with a net surplus in agriculture trade account. India is now the largest exporter of rice in the world.

Why a legal guarantee?

Punjab is no longer the richest state, and nor are the farmers too happy. There are many reasons; the MSP is certainly not one of them.

At a larger level, agriculture is not a good business in today’s world; the farmers earn very little real income. Their incomes have become more vulnerable as consistently the supply of cereals exceeds the demand.

The MSP system though operates quite credibly in Punjab and Haryana. Their farmers receive the MSP prices even if it means the FCI is buying more than 60-80 per cent of their crop.

After 2018, the MSPs are determined by building a minimum 50 per cent income/profit margin over the national average of paid costs and imputed unpaid farm labour cost (termed A2+FL cost). With most inputs, including electricity, coming free of cost, the Punjab farmers get the best profit margin in India.

The current system de-facto operates as a guaranteed MSP for Punjab and Haryana farmers.

Why should they be demanding a legal guarantee in such a situation? If they suspect that the government will someday stop implementing the MSP system, do they really believe they can get it enforced through the courts?

A dysfunctional system

The MSP system was the grand bargain offered to farmers when India faced an acute food shortage. That situation no longer exists. The MSP has outlived its utility.

The current agriculture system in India has the imprint of excessive government involvement making farming effectively a public sector enterprise costing massive subsidies on almost every agriculture input — seeds, fertilisers, power, water, crop loans, and so on.

Roughly about 140 million hectare is sown in India every year. The Government of India spends about Rs 6 lakh-crore in food, fertilisers, interest, PM Kisan, and other farm subsidies every year. State governments spend another Rs 8 lakh-crore. Even after excluding non-cash subsidies and subsidies attributable to consumers, agriculture subsidies are not less than Rs 7 lakh-crore — an average subsidy of Rs 50,000 per hectare.

Most farmers earn much less than Rs 50,000 per hectare; the governments spend a lot, and yet the farmers remain steeped in poverty.

 

A new grand bargain

Adopting a more liberal MSP formula (termed C2 that includes imputed cost of capital) or providing a legal guarantee to the MSP would not work. Farmers’ desperate situation calls for a fundamentally different policy solution.

Let the government give the equivalent of its cash subsidies to the farmers as direct cash transfer on a per-hectare basis. The farmers must also be given full freedom to grow whatever they consider the best in their commercial interest, and sell their produce in the market at the market price.

As the other part of this grand bargain, the governments will have to stop all input subsidies and discontinue the MSP system. There are many options for providing food security to consumers.

The government may continue the MSP system for pulses and edible oilseeds for some time with an option for farmers to receive either the cash grant or sell their produce at the MSP.

The grand bargain will turn agriculture into a good business, replace the rhetoric of farmers as annadatas with farmers as businessmen/businesswomen and enable transition of surplus farmers and land-less labourers to non-agriculture sectors.

Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream’ and ‘We Also Make Policy’.

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)