The Hindu Business Line

Hope on the im­pact of MSP is mis­placed

Pro­cure­ment and dis­tri­bu­tion of com­modi­ties must be stud­ied in tan­dem to de­ter­mine the ac­tual ben­e­fits to farm­ers

- V KU­MARASWAMY Business · Consumer Goods

There is grow­ing frus­tra­tion over the gov­ern­ment’s pro­cure­ment of key grains un­der its Min­i­mum Sup­port Prices (MSPs) not be­ing able to lift the open mar­ket prices of those com­modi­ties and ben­e­fit­ing the farm­ers. What the pol­i­cy­mak­ers and econ­o­mists for­get is that our MSP pro­cure­ment is not an end in it­self, but has to be stud­ied with its end use — dis­tri­bu­tion of such pro­cure­ment un­der our PDS pro­grammes and how they work at cross- pur­poses.

Ef­fect of pro­cure­ment

It is gen­er­ally as­sumed or hoped that once the MSPs are in­creased, the open mar­ket prices will also rise in sym­pa­thy. There is in­suf­fi­cient re­al­i­sa­tion that such pro­cure­ments hardly cre­ate in­cre­men­tal de­mand.

The gov­ern­ment has lim­ited flex­i­bil­ity in in­creas­ing the quan­ti­ties pro­cured un­der the MSP, which may be a surer way of en­hanc­ing prices; in­creas­ing farm pro­duc­tiv­ity from the cur­rent lev­els only harms the farm­ers’ in­ter­ests, rather than help­ing them.

The ef­fect of pro­cure­ments un­der the MSP is quite of­ten over­es­ti­mated. It is nec­es­sary to visualise the im­pact of pro­cure­ment oper­a­tions to sep­a­rate the re­al­ity from hope and wishes.

Let’s try and un­der­stand the im­pact through graph­i­cal ex­hibits. Chart 1 shows the de­mand from buy­ers at var­i­ous prices, in de­creas­ing or­der of prices. The thick ridge line at the top forms the de­mand curve as is de­picted in the left fig­ure.

Any pro­cure­ment by gov­ern­ment agen­cies at any price leads to a kink (fig­ure on the right) in the nor­mal de­mand curve. It shifts the de­mand curve hor­i­zon­tally in pro­por­tion to the quan­tity bought (dd’) at the price point equal to the MSP for the crop.

In Chart 1, due to the gov­ern­ment’s ini­tial ex­tra de­mand, the to­tal de­mand in­creases. But as we will see later, once the gov­ern­ment sup­plies the same though the PDS, the ef­fect is neu­tralised.

Chart 2 stud­ies the com­bined ef­fect of de­mand and sup­ply of the same com­mod­ity as in Chart 1. The nor­mal de­mand curve DD’ (with­out in­ter­ven­tion) shifts to Ddd’d” af­ter pro­cure­ment.

The sup­ply curve is shown as SS’. The mar­ket price with­out any gov­ern­ment in­ter­ven­tion set­tles at P(Free).

When the gov­ern­ment in­ter­venes and pro­cures dd’ from the mar­ket at the MSP price in­di­cated, it will move the mar­ket price of in­de­pen­dent sellers or buy­ers, which will not be equal to the MSP; it will set­tle at lower lev­els.

Where it will set­tle de­pends upon the elas­tic­ity of the sup­ply curve; the flat­ter it is, the lesser will be the price in­crease. In agri­cul­tural mar­kets, there are many tiny sup­pli­ers whose cost struc­ture hardly dif­fers from one to an­other, since many in­puts come heav­ily sub­sidised or free to most play­ers.

Hence the sup­ply curve is of­ten flat and highly elas­tic. The mar­ket price will set­tle at P(MSP) which is way lower than the MSP, but higher than the free mar­ket price of P(Free).

It is a fal­lacy to think that hik­ing the MSPs from the cur­rent lev­els will re­sult in higher open mar­ket prices. Un­less the quan­ti­ties pro­cured are in­creased yearon-year (which will keep push­ing the dot­ted d’d” seg­ment fur­ther and fur­ther to the right), mere yearly MSP in­creases will have nil or neg­li­gi­ble im­pact on open mar­ket prices. Where the P(MSP) set­tles will de­pend more on the width of dd’ than where it is above the P(Free) lev­els (MSPs be­low the free mar­ket prices are use­less any­way).

That’s the rea­son why for­mu­las like 50 per cent over all-in cost of farm­ers will prove in­nocu­ous, ex­cept ben­e­fit­ing those for­tu­nate to sell their crops at the MSPs di­rectly by the gov­ern­ment.

Given the cur­rent lev­els of buf­fer stock in FCI ware­houses, any sig­nif­i­cant in­crease in pro­cure­ment quan­ti­ties will be a haz­ardous ex­er­cise.

Ef­fect of PDS dis­tri­bu­tion

The crops pro­cured un­der the MSP are used in sup­ply­ing them at cheaper (than free mar­ket prices) cost through the pub­lic dis­tri­bu­tion sys­tem to end con­sumers.

This has the ef­fect of chang­ing the sup­ply curve from SS’ (with­out PDS oper­a­tions) to Sss’s” (fig­ure on the right in Chart 2).

This will lower the open mar­ket price, which may even set­tle at lev­els lower than the ini­tial free mar­ket price, as is the case in Chart 2. Will the to­tal quan­ti­ties bought and sold ex­pand as a re­sult of th­ese oper­a­tions?

In­deed it will, since pro­duc­tion will in­crease due to price sup­port and so will con­sump­tion, since more peo­ple at lower lev­els can af­ford to buy more due to the lower PDS prices.

The dif­fer­ence be­tween pro­cure­ment and PDS sup­plies will be ac­cre­tion/de­ple­tion to buf­fer stocks.

Way out

The pro­duc­tion of agri com­modi­ties has been surplus to re­quire­ments for sev­eral years run­ning. The buf­fer stocks with the FCI are far more than norms, and the credit to the FCI from bank­ing sys­tem is at un­com­fort­able lev­els.

One way would be to ex­port the sur­pluses and not sup­ply the same back in home mar­kets through the PDS. Or, sell it to pri­vate sec­tor for food pro­cess­ing.

Al­ter­na­tively, it can al­low food pro­ces­sors and ex­porters to pro­cure crops at the MSPs and re­im­burse the dif­fer­ence be­tween mar­ket price and the MSPs to them. This way, at least the han­dling/stor­age loss can be re­duced.

Si­mul­ta­ne­ously, the gov­ern­ment should re­duce the size of the PDS phys­i­cal dis­tri­bu­tion and re­im­burse the con­sumers through Di­rect Ben­e­fit Trans­fers, even if the con­sumers buy their re­quire­ment through the open mar­ket.

A method to tweak the sup­ply curve by the par­tial ra­tio­nal­i­sa­tion of sub­si­dies on in­puts to in­crease the mar­ket prices and thus ben­e­fit the farm­ers was also ex­plored in ‘How the Agrar­ian Cri­sis can Be Eased’ (Busi­nessLine, June 24, 2019).

It is time we re­alised the ar­eas where the MSPs and the PDS can be ef­fec­tive and where they can’t be, and not be fooled by mis­placed faith and the­o­ries.

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