India’s farmers need a new deal beyond clichéd politics of MSP

NEWDELHI: Finance minister Arun Jaitley’s grand budget announcement of Minimum Support Prices (MSPs) providing assured 50% return to farmers may not actually mean a 50% return. The government admitted on February 9 that it had the so-called A2+FL (a measure of variable costs) and not C2 (which also includes fixed costs) costs in mind while calculating return mark-ups vis-à-vis MSPs. An earlier HT story had pointed this on February 7.

Now that the buzz around budget seems to have settled, a deeper question can be asked. How much of a role can MSPs, and promises of increasing them, play in addressing the growing viability crisis of agriculture in today’s age? Beginning with some stylised facts may help.

Less than one-fourth of India’s total cereal production is procured at MSP. The share of procurement is slightly higher, a little less than one-third, for wheat and rice (Chart 1). Of late horticultural production has surpassed food grain production in India. There is no MSP coverage for fruits and vegetables.

Even the limited procurement which happens is extremely skewed. More than half of total rice and wheat procurement is done from the traditional green revolution states of Punjab, Haryana and Uttar Pradesh (Chart 2).

A National Sample Survey Office (NSSO) report for 2012-13 shows that less than half of all farmers were even aware about MSPs. The figures vary across crops. Only a fraction of those who are aware about MSPs actually sell their crops to procurement agencies. Such sale is able to dispose off only a fraction of their total production (See Chart 3).

These statistics provide a context to the twin challenges of putting into place a holistic and remunerative MSP policy. If MSPs have to be really remunerative, they need a significant hike compared to present levels. An even bigger problem is the skewed crop-wise and state-wise coverage under the procurement net. If this has to be increased significantly, it would require a massive scaling up of government’s procurement operations. This is not just a question of money. Storage of procured food grains is a big problem even at current procurement levels.

The only effective way to dispose procured grains is through public distribution system (PDS). This avenue would come under squeeze as cash transfers replace distribution of food in the PDS.

Both the present and past government has been pushing for abolition of in-kind food security programmes. Politicians, who wax eloquent about the benefits of doing away with in-kind PDS hardly talk about the effect it would have on procurement operations. Wider MSP coverage and cash transfers in food security programmes cannot go hand in hand in India.

The problem does not end here. It is a fact that more and more Indians are getting out of abject poverty. They are also becoming more and more mobile in search of jobs. The middle classes do not need the PDS to buy food grains and other essentials anymore. Scarcity of such things is not something post-reform India would even relate to. Growth in agricultural production is the biggest reason for this.

Both these developments reduce the possibilities of a healthy growth in number of people using the old arrangement of ration shops to access subsidised grains. This means even without cash transfers, the ability of MSPtype policies to support farm incomes will shrink in days to come.

All this is not to say MSP-based PDS is not needed anymore. Starvation deaths have been reported because people could not get their ration due to Aadhaar-related problems. The absolute number of very poor people is still very high. MSP-based procurement is an important anchor of agricultural prices in India. It also protects country’s food security. Many farmers could switch from food crops to commercial crops if there were no procurement.

What all this does suggest is the fact that agricultural policy making has got itself into a cul-desac. The tested method of incentivising agricultural production – MSP-based procurement – is reaching its limits. Uncertainty in farm incomes is only increasing with growing weight of perishables in total agricultural production. Challenges such as climate change related adverse effects on farm production would be here much sooner. Farmers are feeling the pinch of all this, but they have no agency. Farmer politicians do not hold much clout in India’s game of thrones.

Those who do not earn their living from farming are not bothered for the moment. India’s urban middle class probably never had it so good when it comes to consumption of food products. A large variety of food items are being delivered to their doorsteps at discounted rates. The more farmers’ incomes are squeezed, the cheaper they get these things. Although much smaller in number than farmers, this class exercises a disproportionate sway in opinion building.

The political class has by and large chickened out from handling this fundamental political economy divide. It’s happy to placate one class at a time. Lower inflation for large part of the term, followed by a tactical MSP hike towards the end.

The consequences can be disastrous in the not-too-distant future. A deep rooted crisis in farming can end the supply glut largely taken for granted. Signs of growing social unrest are already visible. Any new deal to farmers would require resolution of this contradiction rather than fraudulent promises of MSP hikes.