The anger of agitating farmers over the three farm bills enacted in September, 2020 refuses to subside. Despite a categorical assurance by the Prime Minister, Narendra Modi that the MSP (minimum support price) will continue and that the government was prepared to give this in writing, they are unfazed. Their leaders are insisting that all sales of agricultural produce including those outside APMC (Agricultural Produce Market Committee) mandis – now permitted under the Central law viz. Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 – should be made at MSP and that this must be provided for in the Act.
At present, the Centre notifies MSP for 23 agri-items, however, this MSP has no legal sanction. The Food Corporation of India (FCI) and other central agencies buy paddy and wheat besides a few other items such as coarse cereals and pulses etc at the MSP. These purchases are made from APMC mandis for meeting requirements of the public distribution system (PDS) and giving these to the beneficiaries at heavily subsidized price (for instance, rice Rs 3/kg and wheat Rs 2/kg), under the National Food Security Act (NFSA).
There are a total of about 150 million farmers. Under the extant arrangements, a mere 8% of them get to sell their produce (albeit at MSP) mainly to the state agencies (in terms of tonnage, the quantum picked up by them is a mere 6%). The remaining 92% are left at the mercy of licensed traders and commission agents at the APMCs. They get lower-than-MSP rates; in many cases, their realization could even be a fraction of the production cost.
The new central laws have opened up unlimited opportunities for the farmers to sell their produce even as the APMC/mandis remain intact. Thus, they can go to a private market or enter into a contract for selling to a corporate (processor, aggregator, large retailer, exporter and so on) or form farmer producers’ organization (FPO) and sell under its banner etc. This will help them substantially enhance their price realization which can even exceed MSP depending on the prevailing demand – supply conditions.
The removal of stock limits and other restrictions on processors and exporters through amendment in the Essential Commodities Act will enable them purchase large quantity from farmers for catering to a large and expanding market including exports. This will also improve latter’s price realization from sales.
For farmers entering into contract farming, the gains would be much more. With the corporate providing modern inputs, technology and best agricultural practices, they can increase crop yield and reduce production cost thereby adding to their income. The company’s support can also help them take up other on-farm activities such as bee keeping, poultry farming etc. The farmers will thus have opportunity to increase income in multiple ways – not just higher MSP. Yet, they are insisting on a legally guaranteed MSP. This is bizarre.
In a contract between two private entities, how can the government legislate that buyer pay MSP? If, a law is passed, given the risk of going to jail in case an entity pays a rate lower than MSP (how much can he pay, this is a function of market dynamics!), which trader will dare buy? It could lead to total collapse of private trade in agri-commodities and resultants rotting of farmers’ produce in their fields; forget their expectation of fetching as good price.
The farmers would be living in an imaginary world if they were to believe that the government will come forward to buy (albeit at MSP) every grain offered by them. Apart from the fact that the latter does not have the wherewithal to buy, stock and dispose off produce offered by the former, we need to consider its financial burden.
Already, the food subsidy bill for the financial year (FY) 2020-21 is Rs 2,53,000 crore as per budget estimate (this does not include Rs 1,50,000 crore spent on supplying free food during April-November to address the impact of Covid-19 crisis). This is for procurement, handling and distribution of food at a subsidized price through PDS under NFSA plus the price support for pulses and oilseeds. One shudders to fathom what the subsidy payout will be if it were to buy all of the remaining 94% of farmers’ produce at the MSP. This will also have grave implications for India at the World Trade Organization (WTO).
Under the Agreement on Agriculture (AoA) of the WTO, a developing country cannot give aggregate measurement support (AMS) — an acronym for subsidies in WTO parlance — in excess of 10% of the value of its agricultural production. The AMS includes “product-specific” subsidies and “non-product specific” viz. subsidies on agricultural inputs like fertilizers, seed, irrigation and power.
The “product-specific” subsidy is the excess of MSP paid to farmers over the External Reference Price (ERP) multiplied by the quantum of agri-produce. Whereas, the MSP is taken for the relevant year, the ERP is the average of the international price prevailing during 1986-88 fixed in rupee terms. Compliance has to be ensured both for individual crop as well as at the aggregate level. For instance, the subsidy on rice should remain below 10% of its production value.
In a notification to the WTO in March, 2018, India had reported AMS of about Rs 12,000 crore on rice or 5.45% of production value during 2013-14, whereas, on wheat, AMS was Rs 5,000 crore or 3.53% of production value. However, in a counter-claim (submitted in May, 2018), the USA stated that during 2013-14, Indian AMS on rice was Rs 1,78,000 crore, or 77% of the production value and on wheat, it was Rs 96,500 crore, or 65.3% of the production value.
The US artificially inflated Indian subsidy by considering even quantities not procured by state agencies. This was based on the premise that once procurement by FCI et al sets a benchmark, other purchases are also made at MSP. This premise is flawed as purchase by private entities – whether at MSP or otherwise – has no nothing to do with the subsidy paid by the government. On the other hand, India based its calculation using the quantity purchased by the agencies; this indeed is the right way to go.
Now, if MSP is legalized implying that in the event of private traders not coming forward to buy, the Centre will have to buy all of farmers’ produce at this price, which will tantamount to giving credence to the position taken by the USA. It will result in a scenario whereby Indian subsidy could go well beyond 10% resulting in violation of our commitment under AoA of the WTO.
Insistence on legally guaranteed MSP will also nip in the bud any chance of reforming India’s food subsidy regime. At present, the Centre administers subsidy by asking FCI et al to deliver food to beneficiaries @Rs 3/2/1 per kg and reimbursing to the latter the excess of cost of purchase, handling and distribution over this throwaway price. The cost of purchase is the price paid to farmers or MSP. The MSP is not an end in itself; instead, it is contingent upon running a public stockholding program for food security.
These arrangements and in particular, the mechanism of routing subsidy through agencies is prone to inefficiencies, inflated cost, widespread leakages and misuse of subsidy. There is dire need to stop all this by giving subsidy directly to beneficiaries using direct benefit transfer (DBT) – say transferring Rs 28 per kg wheat in their account and letting them buy from the market paying Rs 30 per kg. When, DBT is implemented, there won’t be any need for agencies to procure food thereby rendering MSP irrelevant.
If, acquiescing to pressure, the government now promises that MSP (albeit legally guaranteed) will stay, logically it will continue to order agencies to purchase food who in turn, will continue to deliver food to the beneficiaries at subsidized price. This clearly implies that DBT will be off the table as it would be fallacious to give subsidy twice over – first by supplying food at subsidized price and then by transferring cash to beneficiary’s bank account.
To conclude, Modi – government must not abandon its reform agenda just because some sections of farming community (esp. middlemen masquerading as farmers) don’t want it. It should stick to the three new farm laws as these offer opportunities galore particularly to majority of small and marginal farmers for realizing better price and increasing income. This will help development of competitive markets and pave the way for transiting to DBT.
This will also help India at the WTO as unlike the existing system of subsidizing agri-inputs and MSP to farmers which are treated as “actionable” subsidies under the AoA, DBT to farmers (this is the practice followed by US and EU) is “non-actionable”. Direct transfers are not subject to any cap; hence India can continue to give cash without any limit and remain compliant with WTO.