The MSP is not an easy calculation. The government is slow to make it legally understandable

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AAs part of the decision to repeal the three agricultural laws, Prime Minister Narendra Modi also announced on November 19, 2021 that the government would set up a committee of experts to ensure that decisions on important issues, including the MSP, be efficient and transparent. The committee was to include agronomists, economists and representatives of farmers. Now that the election dates for several state assemblies have been announced, the committee can only be formed after the results are announced.

The delay in taking the first step towards a legal minimum support price or PSM shows the dilemma and challenges facing policy makers. The agricultural situation is very different from state to state and even from region to region. The work of the committee is not going to be easy.

There are two aspects of MSP’s legal warranty claim that merit discussion. First, if it is desirable in the general interest of India as well as the farmers. And second, if it’s affordable. Of course, the second question is one of the many factors that should be taken into account in determining whether a legal warranty for PSM is desirable.

Our focus in this article is limited to how much it could cost the treasury if the MSP is legally guaranteed.


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How much would the MSP cost?

Experts have tried to assess the financial impact of the legal guarantee for MSP. However, their estimates are based on several assumptions which are not fully explained. According to my colleagues at ICRIER, Dr Ashok Gulati and Shweta Saini, even if only 10 percent of crop production, excluding wheat, rice and sugar cane is purchased, the government will have to bear an expense of Rs 5.4 lakh crore. The underlying assumption is that the economic costs would be about 30 percent higher than the MSP. They further argue that past experience with wheat and rice shows that despite large-scale purchases, market prices are often below the MSP.

Former Union Agriculture Secretary Nanda Kumar, however, estimates that the legal guarantee will only cost an additional Rs 50,000 crore. It assumes that the current level of wheat and rice purchasing will have to continue if MSP is to be legally guaranteed for other crops for which MSP is announced. If his estimate of the current food subsidy level of Rs 240,000 crore is added, the legal guarantee would mean an expenditure of around Rs 300,000 crore or more on that account.

Yogendra Yadav of Samyukta Kisan Morcha and agricultural activist Kiran Vissa wrote that the public distribution system (PDS) should be extended to millets, pulses and oilseeds. They assume that buying only 10 to 20 percent of a crop will ensure that market prices across India reach the MSP level. They also suggested a compensatory payment to pay farmers the difference between the MSP and the price at which they actually sold their produce in the Agricultural Products Market Committee (APMC).


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A difficult calculation

Estimating the financial implication of an MSP legal guarantee would be an extremely complex exercise. This would require information on the production centers of all crops, trends in arrivals, market prices during the year, especially during the peak season of arrivals and farm exit prices realized by farmers when they sell their products to village traders. If government agencies are to purchase so many products from the MSP, they will need additional storage capacity, significant working capital and, most importantly, skilled labor in the purchasing agencies.

Even for wheat and rice, many state-level procurement agencies do not have enough trained staff. Recent experience shows that storage and quality control can be outsourced to private companies as have the Food Corporation of India (FCI) and state agencies. Under the Private Entrepreneurs Guarantee Scheme, 14.4 million tonnes of storage capacity were hiring. However, the quality of the stocks in these godowns should also be closely monitored as the stock value is in the hundreds of crore of rupees.

The calculation of the financial implication also requires an estimate of the storage period of the stock acquired at the MSP. Since the supply will be in the production areas, it may not be safe to sell the stock only to these locations. Transportation to sites deficient in these products and sale will, however, incur additional expenses. This will also lead to lower market prices. These problems arise even in the case of wheat and rice, which have been purchased for several decades.

Each year, the Union government decides how much wheat and rice to sell under the Open Market Sale Scheme (OMSS). Such sales never have an economic cost and the government must also bear the subsidy. The OMSS stock pricing policy has changed from year to year, depending on the government’s outlook on market prices and the trend of food inflation.

In the past, the government has purchased copra, milling copra, sunflower, peanut, tur, mustard, gram, moong, soybean, cotton, legumes and oilseeds from the MSP under various programs. In several commodities, Nafed (National Marketing Federation of Agricultural Cooperatives of India) suffered losses and at one point the accumulated losses reached Rs 1,083 crore. In fact, the closure of Nafed was under consideration by the government in 2014-2016. These losses were eventually made up by the government so that Nafed could be revived.

Likewise, the Cotton Corporation of India has suffered losses for several years and these are reimbursed by the government through the Union budget.


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The government committee must intervene

Managing the sale of a large number of products purchased from a legally guaranteed PSM would, in all likelihood, be a loss-making exercise for the government.

Sugar cane is the only crop for which private buyers are also required by law to pay the price set by the government. The Sugarcane (Control) Order, 1966, issued under the Essential Commodities Act, provides for payment of this price within 14 days of purchasing the cane. During the years of low world sugar prices, Indian sugar could not be exported without some form of government subsidy. In addition, the sugar factories are unable to pay sugar cane contributions and benefit from interest-free loans and several other incentives to pay sugar cane arrears.

In summary, the government purchasing of all legally guaranteed products from the MSP could be a very complex and expensive proposition.

We refrain from giving an estimate of the financial implication as the required assumptions are too difficult to make without a complete database of production centers, previous price trends and a method of selling the purchased stock. In their absence, such an estimate of the cost of a guaranteed PSM through the supply channel might turn out to be a guess.

We must therefore wait for the constitution of a committee of independent and competent experts who will propose various alternatives to ensure that farmers achieve the PSM for their products and that the large fluctuation in prices is minimized.

Hussain, a former Union Agriculture Secretary, is a Visiting Senior Fellow at the Indian Council for International Economic Relations (ICRIER). Mohapatra is the former secretary of the Union, Ministry of Fertilizers and Rural Development. Opinions are personal.

(Edited by Neera Majumdar)

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