How Financially Feasible Would it be to Extend the MSP to All Crops?

There are multiple factors at play, which when put together, paint a more complicated picture than the government having to procure everything the agriculture sector produces.

All indications are that the stand-off between the farmers and the government continue to persist, even if the larger issue has slowly vanished from the front page of newspapers and primetime discussions on TV channels.

More importantly, formal talks between the two sides have stopped. The Union Budget 2021-22 and the address to the parliament by the president hardly referred to the farmers’ problems, while protests have spread with large mahapanchayats taking place across a few states in the last month.

Ministers have tried to belittle the movement by repeatedly characterising it as concerning only one state or that arthiyas or foreign forces are fuelling it. Farmer leaders in several places have been harassed and fines sought to be imposed. These accusations and actions divert attention from the genuine issues raised by farmers, namely, of their incomes and the price they receive for their produce. These issues need to be deconstructed.

Farmers further hit by policy shocks

Farmers, many of whom are at the lowest rung of incomes, claim that their profession is a losing one because they hardly ever cover their full cost of production. Many young farmers want to give up farming and migrate to the cities in search of more remunerative work. The migrants support their families back in the villages by remitting funds to them – another indication of the destitution in rural India. The pandemic aggravated the situation for the migrant workers who lost employment and returned to their villages.

Farmers’ income is a national issue – not just of the Punjab and Haryana farmers. That is why the present government has been promising doubling of farmers’ incomes by 2022. Today in 2021, the farmers’ incomes are possibly less than they were in 2015. This is a result of the hit they took due to decline in demand consequent to demonetisation and now the pandemic. Both of them adversely impacted the unorganised sectors which employ 94% of the workforce. This sector was also adversely hit by the GST and the NBFC crisis. Four hits in four years to the economy since 2016 and its impact on agriculture can only be back breaking.

Also read: From Farmers’ Stir in India to Tunisian Protests, it Is a Story of Masses Left Behind

No wonder farmers have been protesting vehemently, not just recently but for the last few years. Before the 2019 elections, big marches by farmers took place in Maharashtra and outside Delhi. Farmers from Tamil Nadu protested for long at Jantar Mantar. Madhya Pradesh farmers also protested strongly. All these protests have been for obtaining a better price than what they get so that they get a fair income.

Costs not covered

Governments both at the Centre and the states recognise this. The Centre announced in the budget for 2019-20, just before the elections of 2019, the Kisan Samman Nidhi Yojana offering 12 crore farmer families Rs 6,000 per annum. The states had announced their own schemes like, in Telangana and Odisha. The MP government announced the Bhavantar yojana so that the farmers could get the MSP announced by the government. These are income and price support schemes which recognise that the farmers are not getting a fair price.

The price of their produce is crucial for the farmers since that determines their income. Like for a business, income is what is left after deducting the costs incurred. So, the price has to be higher than the cost of production. Lower the price received, lower the income. Hence the farmers’ demand for a remunerative price which not only covers the cost of cultivation but is above that. That is what the Minimum Support Price (MSP) determined by Commission for Agricultural Costs and Prices is supposed to be.

The farmers incur two kinds of costs. What they buy from the market like, wage labour, fertiliser and pesticide and what the family provides, like own labour, seed and own implements. Farmers claim that while the former costs are counted the latter are only partially tallied. So, when the government claims that it is announcing MSP which is 50% over the cost, the farmers say that the full cost is not being covered. Hence the argument that their business is loss making.

Industry largely fixes price based on a mark-up on all costs – so a profit accrues. In agriculture with 14 crore farmers, of whom 86% are small and marginal farmers, farmers largely have to accept the price offered to them by the traders at the farm gate or in the wholesale markets. On their own they cannot fix the price they receive, unlike for industry.

This is where MSP comes into play. A minimum price is important for the farmers for two reasons. Firstly, it needs to cover all their costs and provide a reasonable profit. Second, and perhaps more importantly, they should be able to sell at MSP in the market – not below it.

Official data shows that MSP is available to 6% of the farming families – although some believe this may be an underestimate – and to 23 crops. Most farmers do not obtain the MSP, especially the small ones who are weak in the market and get coerced to sell at below the MSP. Their weak position is a result of not having the surplus to carry on production (and consumption) without borrowing.

Due to this weakness in the markets, the farmers are demanding that MSP be made legally binding on everyone.

The question arises why not have MSP for all crops and for all farmers? It is argued that if this happens, then private trade will not buy the produce and the government will have to buy whatever is produced in the agriculture sector. If agriculture produces 14% of GDP, the government will have to buy Rs 28 lakh crore worth of produce. Critics of the MSP programme therefore ask: where would the money come from?

Budgetary implications

There are multiple factors at play here. Firstly, farmers retain a substantial part of the produce for their own use and the rest is marketed which the government may need to buy. Second, the government is not buying for its own consumption but for the economy – consumers and producers. Food would be bought for consumption while cotton would be bought by textile industry. So, whatever is bought would also be sold and the money spent on procurement would return to the government coffers. It is like working capital borrowed by businesses from banks.

Only the subsidy needs to come from the budget. That is the difference between the sale price and the costs incurred. The costs would include the administrative costs as well as of supplying the grains cheap to the poor.

Also read: Getting the Investment-Subsidy Mix Right in Indian Agriculture

That said, it will also not be the case that the government will have to buy everything. It will only have to offer to buy if the price tends to fall below the MSP. But given that this will be a legally binding price, even private trade (which is not about to disappear) will buy at this price or higher. Only if the price tends to fall will the government need to procure and hold stocks and then the price will automatically go up. So, the cost to the government will be the costs of stock holding and not the value of the entire crop.

However, with MSP announced for all agricultural produce, the cropping pattern will shift and excess production of wheat and paddy in certain States would stop. For instance, more of the needed oilseeds and pulses would get produced as they become more remunerative. So, the present subsidy for excess stocks of wheat and paddy would greatly decline. Further, as farmers get a higher price, various subsidies to them can be scaled down.

So, MSP for all crops and procurement would not necessarily cost the budget much more than what is being spent now on various subsidies. Undoubtedly, it would require much wider and better administrative machinery. There may be inflation for wage and salary earners, both rural and urban. The minimum wages would have to be raised. But the pandemic has already flagged the issue of paying workers a living wage to improve their resilience during a crisis. The huge margins of trade and businesses which are the source of rapidly rising inequality and shortage of demand leading to a slowing economy would need to be checked.

In brief, announcing MSP for all of agricultural produce would lead to development from below and is doable within the present resources. The challenge would be administrative and inflationary pressures but fairness demands that the living standard of others should not be at the expense of the farmers’ incomes.

Arun Kumar is author of Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead.