Procurement is key to a higher farm income

NEWDELHI: Whether higher minimum support prices (MSPS) for summer crops, announced by the Cabinet on Wednesday, will benefit farmers when harvests begin in October depends on how effectively the government can intervene in markets when prices crash below MSPS.

To ensure farmers get declared MSPS for their produce, especially pulses, oilseeds and coarse cereals, the government will have to significantly ramp up its procurement and therefore spending.

Economists Ashok Gulati, Tirtha Chatterjee and Siraj Hussain, experts at the think-tank Icrier, have calculated that if market prices fall 20% below MSP, the government has to incur additional spending of ~113,035 crore in procurement. If the market prices fall by 10%, then the additional expenditure will come to ~56,518 crore. On the other hand, if the fall in market prices below MSP is 30%, the expenditure to ensure farmers get MSP works out to ~169,553 crore, according to these projections.

On the face of it, rice-growers are likely to benefit in a major way because the government procures two commodities in large quantities – wheat and rice.

MSPS are meant to be floor prices for farm produce for even private traders, thereby helping avoid distress sales by farmers. However, farmers tend to benefit little from MSP announcements in crops not backed by assured regular procurement, such as pulses, oilseeds, coarse cereals and maize.

For instance, 2016-17 data alone shows that there were negative margins on several items: ragi (-20%), jowar (-18%), sunflower (-13%), groundnut (-4%), moong (-7%), sesamum (-14%) and urad (-4%). There were similar losses in onions, potatoes and tomatoes. To ensure farmers get MSPS, the government is likely to announce a new procurement policy in October, a commitment made in the Budget 2018-19 speech.

The government seems to have already accounted for the higher costs of procuring rice. The food subsidy bill in the Budget for FY19 has gone up over 20% to ~1,69,000 crore from ~1,40,000 crore in the previous year.

However, since the food subsidy bill is mainly the cost of procuring rice and wheat for the public distribution system, the government will have to provision additional costs for other commodities.

The new procurement policy in the works is likely to be a threepronged mechanism, depending on what states prefer.

The first option is the market assurance scheme, under which states can procure (buy) farm produce directly from farmers at MSP rates when market prices dip below MSPS. The Centre would then provide “compensation of losses up to certain extent of MSP after the procurement and price realization out of sale of the procured produce”, according to a NITI Aayog note.

The second option is the so-called price deficiency procurement scheme. Under this, if the sale price is below the “modal” price – a kind of an average price — then the farmers are paid the difference between MSP and actual price, subject to a ceiling which may not exceed 25% of the MSP. If modal price in neighbouring states is above the MSP, then this scheme doesn’t apply.

The third option is being called the “private procurement and stockist scheme”, under which private firms can be deployed to procure at MSP. The government could offer some policy and tax incentives to private procurers.

A key challenge in the implementation of the price-deficiency payment option is to ensure that traders don’t collude to depress prices artificially, as had happened in December last year in Madhya Pradesh.