Why The Government Needs To Review Support Price And Other Agricultural Policies

On 28 June, Union Minister of State for Fisheries, Animal Husbandry and Dairying, Sanjeev Kumar Balyan, told the Rajya Sabha that the government has no plans to fix a minimum support price (MSP) for milk. The statement should put to rest speculations over the government coming up with an MSP for milk.

The centre has been under pressure to announce an MSP for milk — a tough task considering that milk production costs vary across the country — for over a year now. One of the reasons for the demand is that after it topped the 100 million tonnes (MT) mark early this decade, milk production has been touching new records every year. In 2018-19, milk production is estimated to have topped 190 MT. This has resulted in a production glut and milk prices are stagnating in some parts of the country for dairy farmers.

Demand for MSP hasn’t stopped with milk. In recent months, growers have come up with demand for MSP for turmeric, chilli and a couple of other crops. The MSP is fixed by the government for food grains, cotton, sugarcane, pulses and oilseeds to ensure that farmers get remunerative prices for their produce. Last year, while announcing the budget provisions for 2018-19, the government decided to ensure that farmers got MSPs that were at least 50 per cent higher than their production costs.

Currently, the non-availability of water in various parts of the country calls into question the wisdom of providing MSP to farmers. Should the government provide MSPs for water-intensive crops such as sugarcane and paddy? This is the main contention of those arguing to conserve water.

Another argument against MSP is that not all farmers get it as announced by the centre. Small and marginal growers — who make up over 90 per cent of the farming community in the country with landholding of less than two hectares — usually miss out on MSPs for crops such as paddy, wheat, maize or pulses.

Small and marginal farmers generally miss out on MSP because agriculture is a concurrent subject with the centre being more proactive on policy front. The states have to implement these policies and there is no guarantee that all of them will uniformly implement the policies.

For example, every year the centre announces the MSP for wheat. But there are regional markets or mandis in some parts of Punjab, Haryana, Uttar Pradesh and Chhattisgarh where not all farmers got the MSP. There are various reasons for these farmers not getting the support price — starting from high moisture in their produce to arthiyas (commission agents), who lend them money during the plant-growth state, taking over their crops.

Also, Uttar Pradesh tops in the country’s wheat production but when it comes to procurement of the grain for the centre’s buffer stocks, it ranks way below Punjab, Haryana and Madhya Pradesh. This is because wheat farmers in UP aren’t as powerful as Punjab or Haryana growers or the sugarcane growers in western UP.

The centre fixes the MSP for two reasons. One, to ensure prices that will sustain the livelihood of the growers. Two, to enable the centre to go in for market intervention and procure stocks in case the price of an agricultural commodity falls below the MSP.

It is mandatory for the centre to actively procure rice and wheat since it has to maintain food stocks that can be used at times of emergency, like famine or floods. The government also uses the procured wheat and rice for supply to states for distribution in ration shops. The public distribution in ration shops is mainly aimed at the poor or below-poverty-line people.

The centre has fixed norms for buffer stocks and strategic reserves. These norms are fixed on a quarterly basis for 1 April, 1 July, 1 October and 1 January, with the highest amount set for July. As on 1 July, the country should have 11.54 million tonnes (MT) of rice and 24.58 MT of wheat as buffer stocks. The Food Corporation of India (FCI), which maintains these stocks, should, in addition, have 2 MT of rice and 3 MT of wheat as strategic reserve, as on 1 July.

The reason for a higher stock norm as on 1 July is that the FCI begins procurement of kharif rice on 1 October and until then, no food grain is likely to be procured by it. Wheat procurement generally gets over by the first week of May. As on 1 June, the FCI had ample stocks in its warehouses.

Ashok Gulati, agricultural economist and former chief of Commission for Agricultural Costs and Prices, has said that the actual procurement of the FCI, on behalf of the government, is not even 25 per cent of the total production of various crops. There is no robust procurement system except in paddy, wheat and cotton in the country.

Besides wheat and cotton, the centre has, on certain occasions, ordered procurement of cotton, groundnut, pigeon pea (arhar/tur) and maize when their prices had dropped. While the Cotton Corporation of India procured the natural fibre, the National Agricultural Marketing Federation bought crops such as maize, pigeon pea and groundnut.

One of the drawbacks of the MSP procurement is that sometimes, a portion of the procured stock is lost in storage. Most of the times, the FCI is left holding older stocks since its employees fail to adhere to the “first in first out” policy. However, construction of silos to store wheat and other grains — which is gaining momentum — will help solve this problem ensuring that older stocks are moved out first.

A study by Intellecap with the help of Rockefeller Foundation said that post-harvest losses in cereals such as wheat and rice is between 3.9 per cent and 6 per cent. Post-harvest losses of crops have been estimated at Rs 92,600 crore annually. The losses are due to rotting, leakage and rodents eating them all due to poor storage.

Why should the FCI be holding million of tonnes of rice and wheat at huge costs? In fact, the MSP sometimes results in prices in local markets ruling higher than global markets. Why should the government hold such stocks with a higher carry-over cost when it can import in case of emergency? Or shouldn’t it limit the stocks to meet any food emergency and leave procurement for the public distribution to the respective states?

On the other hand, there is a general belief that MSPs reward inefficiency. For example, if a farmer produces 10 tonnes of paddy on his one hectare of farm, he will get the same MSP as another who could have produced 15 tonnes on one hectare.

What is the incentive for the farmer who has put in extra effort to grow more? Why should both get the same MSP? The question asked is shouldn’t farmers be rewarded more for productivity than just production of an agricultural produce? Also, what about rewarding a farmer if s/he utilises less amount of water or fertiliser or pesticides?

Gulati feels that a holistic approach to agriculture and farmers’ income is required than just the MSP system — a system introduced way back during 1975-76. This will involve coordination among the Agriculture, Food, Food Processing, Rural Development, Fertiliser, Water and Commerce Ministries.

A policy paper, “Agricultural Policy Review of India” — put out by the Organisation for Economic Cooperation and Development (OECD) and the Indian Council for Research on International Economic Relations (ICRIER) — says that policy intervention by the government actually reduces gross farm revenues by 6 per cent annually. While ensuring farmers get MSP, the government is also trying to safeguard the interests of consumers by making food available at affordable prices.

Prevalence of negative market price support has resulted in producer prices in India remaining below comparable reference prices in global markets. This is partly policy-induced and partly due to market supply-chain inefficiencies.

Policies such as Agricultural Produce Marketing Committee (APMC) Acts and Essential Commodities Act are affecting returns to farmers as regulations of these policies impact prices, procurement, stocking and trading. Regulations in APMC and Essential Commodities Act are also affecting investment by the private sector in marketing infrastructure. Overall, these policies depress prices and returns for the farmers.

The paper calls for strengthening regulatory environment governing land laws, integrating competitive markets that will allow private sector to play a greater role, encouraging efficient and sustainable use of farm inputs such as fertilisers, correcting incentives to encourage optimal use of ground water, scaling back the public distribution system, focusing on direct transfer of benefits, bringing key policies under a single umbrella and moving away from export restrictions, among others.

Reforms in APMC and Essential Commodities Act can ensure a proper system for farmers to market their produce. Since the time of Atal Bihari Vajpayee, the centre has been asking the states to amend their APMC Acts but barring a handful, not many have come forward to carry out the necessary changes. Reports say that the centre could soon amend the Essential Commodities Act to encourage private sector participation.

Instead of providing MSP, the centre can perhaps look at ensuring that farmers get the required infrastructure to transport their produce and sell it at their place of choice. No doubt, the Narendra Modi government has come up with the concept of a ‘National Agricultural Market’ that ensures electronic trade of farmers’ produce. But the concept hasn’t really caught on and difficulties are being experienced in trading within a state itself.

Farmers also need to get easier and cheaper access to loans than depend on loan sharks who charge exorbitant interest rates. An easier and cheaper loan will go a long way in encouraging a farmer to give his/her best. It is also high time that the concept of contract farming caught on, so that there is better corporate-farmer coordination and relation.

In July 2018, the then finance minister Arun Jaitley, speaking at a function to celebrate the founding day of National Bank for Agriculture and Rural Development, said the agriculture sector can provide a good example to the world and the country on cooperative federalism.

No doubt, MSP has helped the country for over five decades. But should it continue in the face of the various inefficiencies in the agriculture system? The centre should look for alternatives that will promote efficiency in farming and ensure higher returns to the farmers.

Very often, we find state governments announcing farm loan waivers. This also hasn’t helped improve the lot of growers. Therefore, the centre and the states will have to come together to work out a better system that will ensure good prices for farmers besides promoting key aspects such as higher yield, water conservation and lower consumption of fertilisers and pesticides.

Probably, the centre has partly come up with a solution through farm income support but it is time to review policies regarding the entire agriculture system, including the one on MSP.