Law on MSP not likely to benefit the farm sector

NEW DELHI: A new deal to reshape the country’s antiquated agriculture sector has hit a deadend as protests simmer over three new laws that farmers say will hurt their incomes.

The reforms allow businesses to freely trade farm produce outside so-called mandi system controlled by the government, permit private traders to stockpile large quantities of essential commodities for future sales and lay down new rules for contract farming.

Farmers fear the reforms could pave the way for the government to stop buying staples at federally fixed minimum support prices (MSPs) and would leave them at the mercy of private buyers.

The government has insisted it will still buy staples at MSPs, but farmers have demanded a law guaranteeing minimum state-set prices for all major produce. The aim is to prohibit sale of any farm produce below the MSP threshold.

MSPs, which began with the Green Revolution, mainly benefit paddy and wheat growers because the government procures only these two commodities in sufficiently large quantities.

Indian farmers receive lowerthan-international prices for their produce because of increasing costs of cultivation, inadequate markets and the government’s obsession with keeping food prices low. This has worsened agriculture’s terms of trade, measured as a ratio of prices of agri-products to prices of manufactured items. The crisis, therefore, is not one of low production, but of low prices.

“An MSP is an important policy tool that helped achieve food selfsufficiency because it gave farmers assured prices...It is an administrative exercise that does not have statutory backing,” said Abhijit Sen, a farm economist.

While the government announces MSP for 23 major crops, setting them at 1.5 times the cost of cultivation to account for inflation, analysts say a blanket law mandating that no trader can buy farm commodity below this threshold price makes little economic sense.

The most immediate impact of such a law will be a higher inflation. Higher MSPs prima facie lead to higher overall prices. “Every 1 percentage point increase in MSPs leads to a 15-basis point increase in inflation,” said economist Sonal Varma. A basis point is one-hundredth of a percentage point.

Economists say an MSP mechanism that ignores dynamics, such as demand and global prices, creates distortions. If it is not profitable for private traders to buy at MSP, when demand is low, then the private sector will simply exit the markets. In such a scenario, the government simply cannot be a monopoly buyer of all produce.

The government already procures staggering quantities of surplus rice and wheat, which have become unmanageable. As of September 2020, the government held 70 million tonnes of rice and wheat in federal stocks, whereas food-security norms require reserves of 41.1 million tonnes as of July and 30.7 million tonnes as of October each year.

If MSP is made mandatory, then India’s agricultural exports could become non-competitive as government’s assured prices are way higher than domestic and international market prices. No trader would want to buy at higher price and export at lower rate. So, the assumption behind the new changes is that free competition in markets will ultimately result in a market-clearing price, at which quantity supplied equals quantity demanded, resulting in equilibrium.

According to economist Ashok Gulati, the cost of procuring, storing and distributing rice to the poor comes to about Rs 37 a kg. For wheat, it is around Rs 27 a kg. The cost to company (CTC) of labour of the Food Corporation of India (FCI) is six-eight times higher than private labour.

AGRI EXPORTS COULD BECOME NON-COMPETITIVE AS ASSURED PRICES ARE HIGHER THAN DOMESTIC AND INTERNATIONAL MARKET PRICES.