Every once in a while, an obstructed road in the national capital draws our fleeting attention to an ongoing national controversy. For the last few months, it has been the farm bills stalemate. Stuck in slow-moving traffic, we may have stray thoughts about the price of basmati, but these hardly ever carry over to the dinner table. (These days, we eat quinoa anyway.)
At the heart of the protests are three laws enacted by Parliament in September last year: The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020; The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Act, 2020; and The Essential Commodities (Amendment) Act, 2020.
And the principal bone of contention is the ostensibly laissez-faire provisions that end the monopsony (domination by single buyer) of the Agricultural Produce Market Committee (APMC) mandis and allow the sale and purchase of farm produce in the free market without any market fee, levy or cess.
Protesting farmers and activists feel that opening up of the markets will increase the scope of its manipulation by rapacious corporates with deep pockets, thereby not solving but only exacerbating the middleman problem. Consequently, the fear is that this move will lead to the effective abolishment of the APMCs and the Minimum Support Price (MSP) benefit.
MSP
MSP is a floor price fixed by the government for particular crops. It is the price at which the government guarantees purchase of produce from farmers in case they fail to find buyers. The produce is then sold to the needy at subsidised rates through ration shops. Currently, 23 crops including cereals, pules and oilseeds are included in the MSP scheme.
Even as MSP forms an indispensable element of the Indian agriculture markets, it does not have statutory origins or backing. Instead, the declaration of the MSP has been the prerogative of the government of the day. (Only recently has the government approved MSPs for rabi crops with about 2% increased rates from last year.)
The demand
The average farmer is wary of the lack of legal mandate for the MSP. While the Centre has historically notified the MSP biannually since the 1960s, it isn’t obligated by law to notify or buy at this price. Strikingly, the new farm laws ignored this longstanding demand for legal recognition of the MSP.
The government’s contention has been that the free market model will help farmers command a better price for their produce. It will ensure that they aren’t just beholden to grow the largely subsistence crops covered by the MSP programme, but also cash crops that are handsomely rewarded by the market. This could fundamentally overhaul the farming sector in India, dispelling the sceptre of debt-traps and suicide that currently looms over it.
The protesting farmers don’t quite share the Centre’s optimism. Their response has to be viewed through the prism of the historical distrust for corporates and the formal sector more generally. The agitating farmers want minimum guarantees, security nets, and protection from exploitation.
Economic Reality
In practice, the way the MSP scheme has played out tells an interesting story. For instance, only 6% of farmers in India are able to sell their crops at MSP. The Report of the High Level Committee on re-structuring of Food Corporation of India, 2015, pointed out that a section of small farmers were completely oblivious to the MSP scheme. The Report additionally noted that the MSP of rice in India is one of the lowest in the South Asian region.
The MSP scheme has also encouraged the growth of capital-intensive subsistence crops like wheat and rice. The economic and environmental consequences of this have been alarming and unsustainable: supply gluts, decreasing water levels, stubble burning.
Free market advocates are convinced that if the farm reforms are implemented as intended, agriculturalists may not need the cushion of MSP. But the cord can’t be snapped just like that. In order to push fundamental reforms, we will have to get past the current impasse. A short term fix of MSP for specific crops must be provided. An annual review, based on national demand, can then be conducted to put together the MSP list.
Statutory guarantee of MSP
For this to work, it is imperative that the MSP scheme is baked into law as soon as possible. From a regulatory stand point, legal guarantee of MSPcan be permitted and executed. From an economic point of view, it can be afforded.
The government need not purchase everything. It must employ the MSP benchmark as an emergency intervention to ensure no farmer loses out by selling below this benchmark. If the market price falls below the MSP, the government can get involved and boost procurement. A robust infrastructure of government agencies will be needed to implement and execute this plan.
From a policy point of view, another thing to think about is direct compensation. Government can guarantee a compensation for a difference in payment every time a farmer makes a sale below the benchmark price. A tradeable bond to underwrite this guarantee may be issued. Additionally, the government may guarantee support for subsistence crops.
While both of the above mechanism have already been tried by the government in some shape or form, what it needs is sufficient funding and thoughtful allocation.
Another aspect that may be considered is to declare it illegal to trade below MSP. But the flipside of this is the risk that MSP becomes the fixed price. An example of a price floor becoming the norm to the disadvantage of the intended beneficiary is the minimum wage.
Conclusion
Reform in Indian agriculture will be a long and winding journey. Indian economist Ajay Shah suggests that the focus must be on building a national market. The potential of storage, national trade, international trade and futures trading needs to be explored.
We cannot deny that the average Indian farmer today needs a minimum support. Only, the execution and implementation of this support needs to be made more material and practical. Perhaps this is some food for thought for the next time you’re stuck around the Delhi border. The road to hell is paved with good intentions after all.
Authored by Abiha Zaidi, Partner, Saaz Partners. It was first published on New9, October 2020.