Punjab’s Challenge to the Centre Shows the Limitations of MSP As Agriculture Policy

What we need is for the Centre to enter into meaningful dialogue with the original green revolution states and work out a concrete road map for gradual diversification from paddy to more sustainable crops.

The Punjab assembly has hurriedly passed three pieces of legislation which attempt to nullify the Centre’s recent moves on the agricultural front.

The Essential Commodities (Special Provisions and Punjab Amendment) Bill, 2020, the Farmers’ (Empowerment and Protection) Agreement on Price Assurance and Farm Services (Special Provisions and Punjab Amendment) Bill, 2020 and the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) (Special Provisions and Punjab Amendment) Bill, 2020 were passed by the Congress government.

They now await the assent of the president before they can become law. But in this process, the limitations of the minimum support price (MSP) as a major policy instrument has been exposed.

Out of the three, the Essential Commodities (Special Provisions and Punjab Amendment) Bill, 2020 is the most ironic as it enables the state government to impose stock limits under extraordinary circumstances, which may include famine, price rise, natural calamity or any other situation. The Centre’s amendment means that governments could not act before the price rise is more than 100% for perishables and 50% for non-perishables in the previous year or five years.

Several studies have shown that intervention through EC Act works to the detriment of farmers by suppressing producer prices. Yet, Punjab wants to use this power at its complete discretion.

Also Read: It’s Time To Make Punjab Agriculture Great Again. But How To Do So?

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) (Special Provisions and Punjab Amendment) Bill, 2020 claims that one of the direct consequences of the Centres Acts will be the nullification of the MSP mechanism guaranteed through the existing structure that has stood the test of time. It says that the dismantling of the MSP regime will be detrimental to Punjab’s agriculture. It is also claimed that the marketing law enacted by the Centre is likely to be manipulated by vested corporate interests and the farmers will be left to the vagaries of market forces and this will result in the denial of an optimum price for agriculture produce, fruits and vegetables to farmers.

However, after mentioning all the ‘agricultural produce’, the amendment just says that no sale or purchase of wheat or paddy shall be valid unless the transaction is at MSP or above. It takes away dispute settlement from the sub-divisional magistrate and district magistrate and enables civil courts to adjudicate in case of a dispute.

The law also says that even outside the physical jurisdiction of the APMCs – i.e. in trades area also – the state government can fix a fee on transactions of corporate traders as well as electronic platforms. However, corporate traders are not defined in the law passed by Punjab. It is not clear if it will mean only the bodies incorporated as companies or will also include FPOs or partnership firms or anyone registered under the GST regime. Further details of Punjab’s legislation will only be known when the rules are notified.

File photo of an APMC fruit market. Photo: PTI

Almost no private buyers for wheat, non-b paddy

In Punjab, procurement of wheat is primarily done by the state agencies on behalf of the Food Corporation of India (FCI). In 2020-21, the market arrival of wheat was 127.67 lakh tonnes, out of which 127.14 lakh tonnes was procured at the MSP by government agencies, that is 99.5% of arrivals. The state agencies are paid storage, interest and administrative charges, called carry-over charges, for the wheat until it is taken over by the FCI to be moved to deficient states. The procurement of wheat at the MSP is possible only because the FCI, on behalf of the Central government, assures that it will take over all the wheat procured by the state agencies.

In the Kharif marketing season 2019-20 (October-September), the arrival of paddy in mandis was 163.49 lakh tonne, out of which the procurement was 162.32 lakh tonne, which is 99.28% of market arrival.

Due to high charges in the form of market fee and rural development fund, totalling to 6%, there are almost no private buyers for Punjab’s wheat and non-basmati paddy and the government ends up procuring almost the entire quantity that arrives in the mandis.

Since the procurement system is not half as robust in the neighbouring state of Uttar Pradesh and market prices are generally lower than the MSP, even the flour mills of Punjab have been sourcing wheat from UP.

However, Punjab was aware of market realities and its fee structure did try to match the same in other states. Thus, even before the Centre issued the ordinances in June 2020, the flour mills were not liable to pay market fee or rural development fee for the wheat purchased from within the state while 6% fee (3% each as market fee and rural development fee) was payable on the wheat procured for the FCI at MSP. Similarly, a fee of 6% was payable on non-basmati paddy procured by the government at the MSP while basmati paddy, which is bought entirely by private trade, was liable to pay only 4.25% fee (0.25% as cancer cess and 2% each as market fee and rural development fee).

In September 2020, after the Centre’s new marketing law was enacted, Punjab had no option but to further reduce the market fee and rural development fee on basmati rice from 2% to 1% each.

Also Read: Punjab’s New Farm Laws: High on Rhetoric, Short on Ideas?

Contract farming

The Farmers’ (Empowerment and Protection) Agreement on Price Assurance and Farm Services (Special Provisions and Punjab Amendment) Bill, 2020 is basically a law to regulate contract farming. This Bill provides that under contract farming also, a contract for wheat and paddy cannot be signed for a price below MSP. For other crops, in theory, the farmers can enter into an agreement for a price below the MSP.

Generally speaking, corporates, seed companies, food processors and exporters enter into contract farming agreements for higher-value crops. So, it is inconceivable that there would be any contracts for wheat or non-basmati paddy. Punjab’s amendment does not provide for similar protection to other MSP crops like maize, mustard and pulses and even cotton. In any case, contract farming for non-MSP crops like basmati paddy or fruits or vegetables is under no restriction due to these amendments.

As long as the Centre continues to take over wheat and rice procured by Punjab’s state agencies, the amendments of Punjab have no real meaning. However, due to the treatment of the entire state as a market yard, these amendments may prevent an objection from the Comptroller and Auditor General to payment of 6% fee on such procurement.

In 2019-20, the offtake of wheat in the country was 272.16 lakh tonne while procurement was 341.32 lakh tonne. The procurement of rice was 463.29 lakh tonne (FY 2020) while offtake was 349.75 lakh tonne. Thus, the government procured much more than its requirement, 69.15 lakh tonne of wheat and 113.54 lakh tonne of rice. This has been the trend in recent years.

During the COVID-19 pandemic, the government made good use of excess stock by making additional allocations, until November 2020, under Pradhan Mantri Garib Kalyan Yojana and also for migrants. In 2020-21, the government will again have to grapple with excess stock of wheat and rice. At its peak (about 820 lakh tonnes), the existing storage capacity is about only about 620 lakh tonnes. As of now, the government does not have any long-term plan to increase the capacity to 820 lakh tonnes.

An employee inspects a godown of Food Corporation of India (FCI) where rice bags are being stored in Srinagar, April 14, 2020. Photo: PTI /S. Irfan

Moreover, the Centre does not have a clear roadmap about the future of the PDS and the National Food Security Act. The question of reducing procurement will arise only if the government decides to switch to direct benefit transfer of food subsidy to the poor. Till then, the oral assurance of the Centre that procurement will continue can be trusted by Punjab.

Irrespective of India’s requirement of rice for PDS, Punjab will do well to actively reduce the area under non-basmati rice and encourage farmers to diversify to other high-value crops. It will need the private sector to create modern supply chains for purchasing Punjab’s other produce, particularly fruits and vegetables.

Since Punjab and Haryana have provided food security to India for over 40 years, their contribution should be respectfully acknowledged. A genuine respect for federalism should have persuaded the Centre to enter into a dialogue with the original green revolution states and work out a concrete road map for gradual diversification from paddy to more sustainable crops. An essential component of this road map may well be a graded direct income support to farmers in the original green revolution states.

Siraj Hussain was Union agriculture secretary. At present, he is visiting senior fellow, ICRIER.