‘Legalizing MSP spells doom for mkt, implies takeover of trade by govt’

Was it a mistake to rush the laws without discussion in Parliament? Why couldn’t the government quell farmers’ suspicion over the intention behind the laws?

Any big change, especially in regulations, faces resistance. Since it involves improvement in the long-run welfare of the people, especially farmers, it becomes imperative for all right-thinking citizens to support such change. While there can be disagreements relating to some elements of the change, in the case of the farm laws, political opportunism and ideological-but-unfounded intellectual opposition tried to take advantage of farmers’ stir for political mileage, overlooking the benefits of reforms. These groups frustrated attempts made by the government to clear apprehensions around farm laws. The government’s decision to repeal the farm laws shows the respect towards the sentiments of farmers who were opposed to these reforms, which is quite expected in a democratic system.

The sustained demands for legal guarantees for minimum support price (MSP), higher MSP, and provisions for treating transactions at prices below MSP as unlawful reflect the failure of markets to provide remunerative prices to producers. Why are market prices unremunerative?

Legal MSP cannot work if not supported by demand and supply side factors. At best, it can work only when trade pays lower prices to farmers as compared to competitive market price. Thus, legal MSP can work if the level of MSP is close to the open market price or market clearance price. If MSP is anchored to a fixed formula of cost-plus, which happens to be above the price supported by demand, then private players will not have any incentive to buy farmers’ produce.

Price data shows that after the adoption of the new formula for MSP in 2018, MSPs remained higher than open market prices and international prices of most of the crops. In such a situation, neither the private sector will buy the produce, nor the produce can be exported without subsidizing it. Thus, if we want to protect the farmers against unremunerative or uncompetitive prices through legal MSP, we should be guided by the price recommended by an institution such as the Commission for Agricultural Costs and Prices which takes into consideration demand side factors and possible open market prices. Thus, making MSP legal by itself will not ensure that market prices will move to MSP.

When the private sector does not buy at legal MSP, all the produce that is offered for sale will simply not be purchased. Market clearance will not happen, leading to chaotic situations. Inevitably, the government will be called in to buy the produce. This amounts to taking over agriculture trade by government which has serious implications. Nowhere in the world, not even in the socialist countries, this kind of mechanism is working. It should also be kept in mind that non-MSP crops and products like fruits, vegetables, milk, egg, and fish are showing much higher growth rate than MSP crops in the country. Demand-driven production can be much more remunerative for farmers than production fixated to MSP.

Will the Centre accept demands for legally guaranteed MSP?

The government is taking all genuine measures to ensure that farmers receive remunerative prices. Since 2014, the number of farmers benefiting from MSP has seen a big increase as effective MSP has been extended to more crops, such as pulses and oilseeds and more states by expanding procurement operations. Procurement of rice has increased by 63% between 2013-14 and 2019-20, as against only 11% increase in production in the same period. I advocate alternative measures like deficiency price payment (DPP) rather than the use of procurement to pay MSP to farmers. I feel DPP type methods are globally practised and are much more pragmatic, and economical than legally granted MSP. This also does not distort prices which has serious adverse implications, especially for export and import.

Legalizing MSPs spells doom for the crops market and implies takeover of trade by government. Such interventions are fiscally ruinous. It will also kill the entrepreneurial skill of our innovative farmers, robbing them of opportunities to take advantage of emerging demand patterns. The resource requirement of such interventions will be so huge that no government will be left with resources to help farmers through other means like investment in public infrastructure, irrigation, and other incentives. The danger of over-reliance on MSP is already visible in the state of Punjab. Agriculture has reached an almost static stage there. The state is unable to diversify away from crops like paddy, which is destroying its natural resources and environment, marring long-term prospects of farming.

Views are personal.