By Disha Rawal
In the Union Budget, the government announced its intention of doubling farmersí incomes, and that it would now fix a Minimum Selling Price (MSP) for 23 crops at 1.5 times the input costs of the farmers. While this is being hailed by many as a positive move, there are various apprehensions about the application of MSP policies, and the restriction of agricultural policy to simply procurement prices.
Methodological concerns raised
Farmers have failed to increase their incomes over the years, despite robust procurement from the government over the years. There are methodological concerns about the application of procurement policies. Procurement of grains is the highest in case of wheat and rice, and that too from relatively prosperous states like Punjab and Haryana. As the public distribution system (PDS) skews consumption towards cereals, prices of rough grains suffer and farmersí income reduces. †MSP has traditionally existed for many crops, including coarse grains. That hasnít correlated positively with farmer incomes.
So apart from announcing MSPs, the application of the policy has to be suited to the needs of farmers. For example, Madhya Pradesh gives the difference between the MSP and the market price. However, that has proven to be ineffective considering how farmers lack the papers needed to get payments. Moreover, market prices are manipulated to maximise deficiency payments. On the other hand, various states seek to subsidise farmers, and not crops, by reducing prices of agricultural land.
In this context, the governmentís cost plus approach has been criticised since when profits are pegged to costs, the producer loses the incentive to reduce costs and produce efficiently. †In fact, costs may be inflated to increase profits. Bulk subsidy of his kind often leads to overproduction and glut. This happened recently in the case of pulses when import combined with subsidy-incentivised over-production created such a huge glut that pulses were sold below the MSP. This happened especially because pulses arenít highly consumed in India thanks to the governmentís consumption distorting policies.
MSP: The end-all and be-all?
When we set targets as ambitious as doubling farmersí income, we have to consider a multiplicity of factors. For example, it is said that if irrigation facilities could be provided to all farmers who work on the 55% of agricultural land that is un-irrigated, farmer incomes would increase substantially. Similarly, cold storage facilities and digital markets are required to eliminate middlemen who eat into the farmersí margins, exploiting the lack of knowledge on their side.
MSP may not be a very effective tool in the near future. As middle-class Indians reduce their dependence on PDS and states move towards cash transfers, procurement will decrease. MSP will thus soon lose relevance. We need to shift in a timely manner to more holistic strategies.
We also need to make agricultural input markets more competitive. This is because high fertiliser prices have been a major factor impeding income growth. †As costs go down, India will be able to realise its export potential. However, access to global markets is also necessary, which is somewhat distorted by the mass subsidising that takes place in developed countries and the trade tariffs they impose. With a free trade structure and focus on driving down costs, while simultaneously giving a level playing field to farmers from all regions, India may inch closer to increasing distressed farmersí income, rather than by relying on age-old, inefficient methods.
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