MSP Will Stop Corporate Encroachment in Agriculture, Ensure Domestic Food Security

The year-long protest by farmers and workers compelled the Centre to repeal the three contentious farm laws, which were designed to further corporate encroachment in agriculture, on November 29. On December 11, the protest ended but not before the protesters reiterated their demand for a legal guarantee on Minimum Support Price (MSP).

As of now, the Commission for Agricultural Costs and Prices (CACP) recommends MSPs for 23 commodities. The MSP is announced prior to the sowing of crops by ostensibly taking into account the cost of cultivation from the CACP. However, the MSP is primarily based on the paid-out cost (accounting cost) and imputed wages of family labour rather than the economic cost (which includes accounting cost plus imputed wages of family labour, imputed rent and interest on capital).

The Agricultural Produce Marketing Committee (APMC) markets, which are the sites of procurement of agricultural produce at MSP, were established in the 1960s to try and safeguard farmers against the predatory practices of private procurers. It was envisaged that the markets would also assist farmers in obtaining remunerative prices for their produce. But their geographical coverage is limited.

Further, changes in agricultural policies in a neoliberal regime have resulted in a decline or removal of subsidies for seeds, fertilisers, agricultural machines, etc., which has increased the cost of cultivation. Besides, the large-scale decline in government expenditure on research and development along with agricultural extension services has led to higher use of fertilisers, pesticides and other chemicals to maintain the level of agricultural output on an ecologically unviable trajectory of conventional farming. This too has led to an increase in the cost of cultivation.

In a column in The Indian Express on November 29, Harish Damodaran, a senior fellow at the Centre for Policy Research and a journalist, estimated that the cost of public procurement at guaranteed MSP (based mainly on accounting cost) would have been under Rs 9 lakh crore in 2020-21. This estimate is based on the assumption that 75% of the produce is brought to the market.

Damodaran further argued that a guaranteed public procurement of agricultural produce would lead to an increase in the fiscal deficit. The magnitude of this increase in the fiscal deficit would depend negatively on that part of the publicly procured agricultural produce that is sold to the private sector and positively on that part which is distributed at issue prices (that are below public procurement prices) through a (targeted) public distribution system.

Damodaran suggested another mechanism to ensure payments equivalent to the MSP via “deficiency payments” by the government to farmers in cases where private buyers purchase at lower prices rather than making MSP a binding price for the private sector. In a previous column published in the same newspaper on February 3, 2018, he had also mentioned that the Swaminathan Commission did not specify the cost to be taken into account for calculating the MSP. He further argued in the November 29 column that public procurement is “cumbersome” as the Food Corporation of India has large stocks of grain.

Damodaran’s observations and conclusions need to be critically reviewed and elaborated on in some respects. To begin with, the MSP calculation suggested by the Swaminathan Commission is based on economic cost rather than accounting cost. Further, there are some complexities in the working of public procurement that differ from private procurement. In the case of crops other than rice and wheat in Punjab, Haryana, etc. as well as almost all crops in other areas of India, the MSP announced by the government has only a limited impact on the selling price of farmers.

Farmers do not receive a price for their produce that equals the MSP leave alone one that exceeds the MSP in most parts of the country. This is because agricultural procurement by state governments is limited since the distribution of Centre-state financial resources is decisively tilted in favour of the Union government. The Centre too does not engage in significant procurement of agricultural produce outside some selected states.

Many small and marginal farmers are unable to sell their produce at MSP because of the following reasons. First, the delay in payment for public procurement compels many such farmers to sell to private procurers below the MSP. Accepting this delay would imply that such farmers would be unable to obtain inputs in a timely manner for the next sowing. Nor would they be able to meet debt payment commitments on time.

Second, there is no mechanism to publicly procure the crop from farmers on site. Therefore, public selling costs for small and marginal farmers rise due to high transportation costs to distantly located APMC markets. Public selling costs also rise due to their inability to access economical storage facilities for their produce while they wait for public procurement. Consequently, these farmers are compelled to sell to private procurers at prices below the MSP.

Third, with the institution of e-NAM (National Agricultural Market), the relative absence of adequate documentation reduces public procurement from small and marginal farmers. This is the case since many of them cultivate on rented land without registered contracts. Further per acre sale limits at MSP in a state (to ostensibly discourage interstate arbitrage of agricultural produce by private procurers) reduce public procurement from small and marginal farmers.

Our recent fieldwork in Rajasthan validates the link between e-NAM and the reduction of public procurement from small and marginal farmers. The tackling of these problems requires that these delays in payments for public procurement be eliminated and the institution of a public-led process of a decline in public selling costs for farmers by expanding the countrywide coverage of APMC marker-based procurement.

A system of “deficiency payments” to try and guarantee MSP is likely to be characterised by the following problems. First, the lack of documentation for many small and marginal farmers would lead to the exclusion of a large section of them from getting the “deficiency payments”. Second, if public procurement ceases, the gap between the MSP and the private procurement price may be so high that the fiscal outgo on “deficiency payments” may be larger when compared to one with public procurement.

Third, delay in “deficiency payments” will be more adverse than delay in payments for public procurement since the former will affect all farmers. Lastly, with reduced or no public procurement, either the public distribution system would diminish or require more resources to maintain.

Further, it has been argued that a guaranteed MSP would increase the fiscal deficit. But the magnitude of this increase would possibly be lower than previously estimated. This would be the case since a legally guaranteed MSP would increase rural incomes and expenditure, which by increasing output (in the short run) and investment (in the long run) would also increase tax revenue.

Besides, if the sale to the private sector out of publicly procured agricultural produce is at a price that is a markup over the MSP and if foreign trade is regulated, then private procurers will be induced to procure at MSP from farmers. This would reduce the actual magnitude of public procurement of agricultural produce—and therefore, the fiscal deficit—without undermining a guaranteed MSP system.

A guaranteed MSP system will also reduce public storage costs/wastage if it is complemented by a move towards a universal public distribution system with an expanded list of issues of relevant items from the crops supported by the MSP.

A guaranteed MSP system is a decisive move against corporate encroachment in agriculture. Farmers and workers, therefore, see it as a necessary complement to the repeal of the laws. The Centre has promised to form a committee that will also represent farmers and workers to ostensibly work out the details of a guaranteed MSP system.

The demand for a guaranteed MSP led by public procurement is also necessary to ensure that the crop composition of the area under cultivation does not shift to meet metropolitan demand as was the case during the colonial period. This does not preclude a guaranteed MSP-led agroecological diversification of area under cultivation towards other food crops (such as millets) that will also advance public health. A guaranteed MSP system is also a covenant for domestic food security.

Navpreet Kaur is an assistant professor at Janki Devi Memorial College and C Saratchand is an associate professor at the department of economics, Satyawati College, University of Delhi. The views expressed are personal.