MSP in the age of surplus

#GS3 #Agriculture #FarmReforms


MSP (Minimum Support Prices) regime was the creation of the era of scarcity in the mid-1960s. Indian agriculture has, since then, turned the corner from scarcity to surplus. 

  • The policy instruments of dealing with shortages are different from those dealing with surpluses.
  • In a surplus economy, unless we allow a greater role for markets and make agriculture demand-driven, the MSP route can spell financial disaster.


Transition in agriculture 

  • This transition is about changing the pricing mix — how much of it should be state-supported and how much market-driven. 
  • The new laws are trying to increase the relative role of markets without dismantling the MSP system. Of course, no system is perfect, be it the one based on MSP or that led by the markets. 
  • But the MSP system is much more costly and inefficient, while the market-led system will be more sustainable provided we can “get the markets right”. 


Why MSP is uneconomical?

  • MSPs pertain primarily to paddy and wheat in selected states — in recent years, the government has also been buying some amounts of pulses, oilseeds, and cotton occasionally. A perusal of the MSP dominated system of rice and wheat shows that the stocks with the government are way above the buffer stock norms.
  • The economic cost of procured rice comes to about Rs 37/kg and that of wheat is around Rs 27/kg. The CTC (the cost to company) of the departmental labor of the Food Corporation of India is six to eight times higher than contract labor in the market. No wonder, market prices of rice and wheat are much lower than the economic cost incurred by the FCI.
  • The FCI’s burden is touching Rs 3 lakh crore. We are simply postponing a financial crisis in the food management system.


Learnings from the white revolution 

  • In the case of milk co-operatives, pricing is done by the company in consultation with milk federations, not by the government. 
  • It is more in the nature of a contract price. R S Sodhi, the managing director of the largest milk co-operative (GCMMF, AMUL) has said that milk does not have an MSP. 
  • It competes with private companies, be it Nestle, Hatsun, or Schreiber Dynamix dairies. And, the milk sector has been growing at a rate two to three times higher than rice, wheat, and sugarcane. 
  • Today, India is the largest producer of milk — 187 million tonnes annually — way ahead of the second-ranked US which produces around 100 million tonnes every year.


Way forward 

  • Apparently, in the next three to five years, hundreds and thousands of companies will be encouraged to build efficient supply lines somewhat on the lines of milk, as a result of these changes in farm laws. These supply lines — be it with farmers producer organizations (FPOs) or through aggregators — will, of course, be created in states where these companies find the right investment climate. Some will fail, but many will succeed.
  • These companies will help raise productivity, similar to what has happened in the poultry sector. Milk and poultry don’t have MSP and farmers do not have to go through the mandi system paying high commissions, market fees, and cess. The choice is ours: Do we want growth that is financially sustainable, or create a mess somewhat like what we have created in the case of rice, wheat, and sugar.
  • The pricing system has its limits in raising farmers’ incomes. More sustainable solutions lie in augmenting productivity, diversifying to high-value crops, and shifting people out of agriculture to high productivity jobs elsewhere.
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