Apart from the decision to repeal the three farm laws, Prime Minister Narendra Modi also announced on 19 November 2021 that the government will set up a committee of experts to ensure that decisions on important issues, including MSP, are effective and transparent. The committee was to include agricultural scientists, economists and representatives of farmers. Now that the dates of elections to several state assemblies have been announced, the committee may be set up only after the results are declared.
The delay in taking even the first step towards a legal minimum support price or MSP shows the dilemma and challenges before policymakers. The agricultural situation is vastly different across the states and even regions within the states. The job of the committee is not going to be easy.
There are two aspects of the demand for legal guarantee of MSP that merit discussion. First, whether it is desirable at all in the overall interest of India as well as the farmers. And second, whether it is fiscally affordable. Of course, the second issue is one of the many factors that would have to be considered while taking a view on whether legal guarantee for MSP is desirable.
Our focus in this article is limited to how much it might cost the exchequer if MSP is legally guaranteed.
Also read: India can’t afford a hurried resolution on MSP demand. It can cause chaos, long-term damage
What would MSP cost?
Experts have been trying to assess the financial impact of legal guarantee for MSP. However, their estimates are premised on several assumptions that are not fully explained. According to my colleagues in ICRIER, Dr Ashok Gulati and Shweta Saini, even if only 10 per cent of the production of crops, excluding wheat, rice and sugarcane is procured, the government will have to bear an expenditure of Rs 5.4 lakh crore. The underlying assumption is that the economic costs would be about 30 per cent higher than the MSP. They further argue that past experience of wheat and rice shows that despite large scale procurement, market prices are often below the MSP.
Former Union agriculture secretary Nanda Kumar, however, estimates that legal guarantee will cost only an additional Rs 50,000 crore. He assumes that the current level of procurement of wheat and rice will have to continue if MSP has to be legally guaranteed for other crops for which MSP is announced. If his estimate for the current level of food subsidy of Rs 240,000 crore is added, legal guarantee would mean an expenditure of about Rs 300,000 crore or more on this account.
Samyukta Kisan Morcha’s Yogendra Yadav and farmer activist Kiran Vissa have written that the Public Distribution System (PDS) should be expanded to millets, pulses, and oilseeds. They assume that procurement of only 10-20 per cent of a crop will ensure that the market prices across India rise to the level of MSP. They have also suggested price deficiency payment to pay the farmers the difference between the MSP and the price at which they actually sold their produce in the Agricultural Produce Market Committee (APMC).
Also read: MSP won’t bankrupt India. It’s complex, but so is disinvestment
A difficult math
The estimation of financial implication of a legal guarantee of MSP would be an extremely complex exercise. It would require information on production centres of all crops, trends of arrival, market prices during the year, especially in peak arrival season and farm gate prices realised by farmers when they sell their produce to village-level traders. If government agencies have to procure so many commodities at MSP, they will require additional storage capacity, large working capital and most importantly, qualified manpower in procuring agencies.
Even for wheat and rice, many state-level procurement agencies do not have enough qualified staff. Recent experience shows that the storage and quality control can be outsourced to private companies as the Food Corporation of India (FCI) and state agencies have done. Under the Private Entrepreneurs Guarantee Scheme, 14.4 million tonnes of storage capacity have been hired. However, the quality of stocks in these godowns also needs to be closely supervised as the value of stocks is in hundreds of crores of rupees.
The calculation of financial implication also requires an estimation of the period of storage of stock procured at MSP. Since the procurement will be in producing areas, it may not be prudent to sell the stock at these locations only. Transportation to locations having deficiency of such commodities and sale will however mean extra expenditure. It will also depress the market prices. These problems are experienced even in the case of wheat and rice, which have been procured for several decades.
Every year, the Union government decides the quantity of wheat and rice to be sold in the Open Market Sale Scheme (OMSS). Such sales are never at economic cost and the government has to bear the subsidy on this as well. The pricing policy of OMSS stocks has changed from year to year, depending on the government’s outlook of market prices and trend of food inflation.
In the past, the government has procured ball copra, milling copra, sunflower, ground nut, tur, mustard, gram, moong, soybean, cotton, pulses and oilseeds at MSP under various schemes. In several commodities, Nafed (National Agricultural Cooperative Marketing Federation of India) incurred losses and, at one point, the accumulated losses touched Rs 1,083 crore. In fact, the closure of Nafed was under consideration by the government in 2014-16. These losses were finally met by the government so that Nafed could be revived.
Similarly, the Cotton Corporation of India has incurred losses for several years and they are reimbursed by the government through the Union Budget.
Also read: Farm laws debate missed a lot. Neither supporters nor Modi govt identified the real problem
Govt committee needs to step in
Managing the sale of a large number of commodities procured at a legally guaranteed MSP would, in all likelihood, be a loss-making exercise for the government.
Sugar cane is the only crop for which private buyers are also mandated by law to pay the price fixed by the government. The Sugarcane (Control) Order, 1966, issued under the Essential Commodities Act, envisages payment of this price within 14 days of cane purchase. In years of low global prices of sugar, Indian sugar cannot be exported without some form of subsidy from the government. Moreover, the sugar mills are not able to pay cane dues, and are given interest-free loans and several other incentives to pay the cane arrears.
To sum up, government procurement of all legally guaranteed commodities at MSP could be a very complex and expensive proposition.
We are refraining from giving an estimate of financial implication as the assumptions required are too difficult to make without a comprehensive database of production centres, previous trends of prices and a method to sell procured stock. In their absence, such an estimate of the cost of a guaranteed MSP through the procurement route could turn out to be only a guess.
We should therefore wait for the constitution of the committee of independent and knowledgeable experts who will come up with various alternatives to ensure that the farmers realise the MSP for their produce and wide fluctuation of prices is minimised.
Hussain, a former Union Agriculture Secretary is Visiting Senior Fellow at Indian Council for International Economic Relations (ICRIER). Mohapatra is former Union Secretary, Ministry of Fertilisers and Rural Development. Views are personal.
(Edited by Neera Majumdar)