By Priyanka Venkat
The agrarian crisis looms over the country and the time for reform is way past due. The plight of distressed farmers is well known. Images of them destroying produce, of hanging themselves in protest, and their families struggling to survive on minuscule incomes while trying to get out of an endless vortex of growing debt, make for a desperate call to action. While successive governments have failed to adequately address the compounding problem in the sector, the current government has decided to give it a go, as highlighted in the budget speech.
An increase of 50% in the minimum support price (MSP) over production cost for unannounced Kharif and the remaining Rabi crop, has been promised to farmers. While this would provide much-needed security to farmers during unfavourable market conditions, experts have differing views on whether such a move would push up food prices and lead to inflation.
So, what is a minimum support price? It is the minimum price at which food crops are procured from farmers, in the event that market prices fall. If market prices fall, the Food Corporation of India (FCI) buys the produce from farmers at the minimum support price, and stores the produce in its warehouses.
Analysts on the fence about the move
The Associated Chambers of Commerce and Industry of India (Assocham) believes that fulfilling the promise of a higher MSP could prove to be difficult for the government, as while protecting farmers, it can still have inflationary outcomes affecting consumers. Sandeep Jajodia, the President of Assocham said, With inflation maintaining an upward trend for last six months in a row and possibly moving towards six percent mark that can make general households restive, the government has a tough task of balancing interests.
Some analysts, however, believe that the increase in MSP will not necessarily accelerate inflation. This is because it is possible that the hike will not cover substantial costs, thereby not making much of a difference to the status quo in the first place. Lets take a closer look at this. There are three types of production costs identified by the government. One is the actual paid out cost, also known as A2. Second, is the addition of the actual paid out cost and the imputed cost of family labour, also known as A2+FL. Thirdly, the comprehensive cost of production, known as C2. Calculating this cost involves adding imputed rent and interest on capital and owned land, to A2+FL.
Announcements on part of the government
On February 9, 2018, the Finance Minister clarified which cost will be taken as the basis for MSP. He said that A2+FL would be taken into account, and this would be the benchmark followed in the future as well. So here is the issue with this. The cost that really burdens farmers and requires a higher MSP is the comprehensive cost of cultivation or C2. The MSP for other costs like A2+FL is already substantial, while the MSP for comprehensive cost is minimal. For instance, the MSP of paddy in 2017-18 is nearly 40% more than the cost of production measured as A2+FL, while it is only 4% more than C2. This contrast is seen even in wheat, where the MSP is 112% more than production cost in the form of A2+FL, whereas it is only 38% higher than C2. Despite farmers clamouring for a higher MSP based on C2, their demands will be unmet once more.
Ashok Gulati, an agricultural economist, in an interview with The Wire, said, A lot of unnecessary confusion has been created about this. The MSP has been 50% higher than A2+FL for the last ten years. There is nothing new about that. Even at the time, the BJP had put the promise of cost plus 50% in its manifesto, the MSP was already more than 50% higher than the A2+FL. So, if they had A2+FL in mind, why put this promise in the manifesto? The MSP was already higher. Considering that there is not going to be a substantial change in the system, this new 50% hike promised by the government is both insufficient and unlikely to lead to a strong upward push to inflation.
Direct bank transfers to help reduce costs
Regardless, consistently increasing MSPs have the potential to increase food inflation. It is, therefore, worth considering alternate ways to deal with this. An important way to reduce costs and contain food inflation lies in the way the MSP is administered. An issue that often arises is that instead of purchasing only the amount of produce that is required to be kept as buffer stock, the FCI purchases everything that is offered. In many cases, the product does not reach the market, either through hoarding or a breakdown in distribution. This results in the market perceiving a shortage, which leads to buyers purchasing more than they need. In other words, a demand and supply mismatch that could lead to an increase in prices of food grains.
Moreover, procurement costs for the FCI are often higher than the MSP, because they have the additional costs of storage and state taxes. This contributes towards food inflation too. To deal with this, instead of procuring the goods from the farmers, the difference in the MSP and market price can be given to them directly through direct bank transfers. So, farmers can sell their produce in the open market at prevailing market prices, and they are provided with the balance amount through the cash transfer. This will reduce the cost to the government significantly as well as cut down on the various middlemen in the distribution system, thereby helping towards containing food inflation.
The need for a long-term solution
The minimum support price does not serve as a panacea to all the problems faced by farmers. There is a need to delve deep and look for long-term solutions that improve the productivity of the sector. One is cutting down the various middlemen and restrictions on direct buying from farmers. Fragmented land holdings, is another pertinent issue that needs to be addressed. The small holdings make it harder for the farmer to improve the productivity of the land, and the need for sustenance often forces him to approach moneylenders who charge exorbitant rates of interest. This coupled with volatile prices and erratic weather conditions often leave the farmer powerless. Farming cooperatives coupled with contract farming, if implemented effectively, can provide a permanent solution to the farming crisis.
How does this work? Farmers pool their land (including that of small farmers) and jointly carry out farming activities. The profit is then distributed in the ratio of the land owned by them. Those who do not own land are given employment under this approach, where they receive wages for working on the farm. Cooperatives enable farmers to have access to more resources, thereby reaping the benefits of increased productivity.
The government has proposed cooperative farming repeatedly over the years, but poor implementation has hindered its progress. An important issue to keep in mind is that it is the self-help groups (the farmers) who should be in control of such cooperatives, instead of the state governments. The state governments need to be flexible and understanding of issues on the ground and provide the necessary support.
Remedial measures from here onwards
Through cooperative farming, farmers can get better prices for their products from corporations who are interested in large-scale production. Large corporations enter into contracts with small and medium farmers, whereby they are required to supply products that meets the requirements of the corporation. Contract farming enables farmers to sell their produce directly to the buyer (such as a company) without being exploited by middlemen. Contract farming enables the farmers to get fair prices for their produce through a pre-negotiated sale price with the company. This protects them from the risk of fluctuating prices in the market.
Companies have a vested interest in ensuring that production targets are met and therefore provide various forms of support to farmers in the form of precision farming. The economies of scale enable them to provide farmers with access to better technologies at a cheaper cost, equip farmers to analyse the weather, use better fertilisers, and implement water saving systems such as drip irrigation. Such irrigation techniques are often prohibitively expensive for small farmers to implement on their own.
The road to resolving the crisis at hand is a dark and difficult one. Immediate action is required to resolve the woes of our farmers if we want to stop the problem from compounding further.
Featured Image Source: shankar s. on Visual hunt / CC BY