Editorial✍ Financial Express

MSP vs Markets: A question of efficiency

Agri sectors where government controls prices are in trouble

Issues with the MSP system:

  • Created huge grain stocks with the government:
    • MSP is implemented primarily in paddy and wheat in selected states. In recent years, some amounts of pulses, oilseeds, and cotton are also bought by the government occasionally.
    • As a result of MSP-dominated system of rice and wheat, the stocks with the government are bulging way above the buffer stock norms (see graphic below).
  • Overall cost is higher than market cost:
    • The economic cost of procured rice comes to about Rs 37/kg and wheat at around Rs 27/kg.
    • The salary of departmental labour of the Food Corporation of India (FCI) is 6-8 times higher than contract labour in the market.
    • As a result, market prices of rice and wheat are much lower than the economic cost of FCI.
      • In Bihar’s rural areas, for instance, you can easily get rice in retail market at Rs 23-25/kg.
  • FCI procurement falls foul of WTO rules:
    • As the economic cost of FCI’s procurement and storage is higher than market prices, no grain stocks with the FCI can be exported without a subsidy.
    • However, this invites WTO objections.
  • Created hidden financial crisis in food management:
    • The real bill of food subsidy is ever increasing but it is not reflected in the central budget as the FCI is asked to borrow more and more.
    • The debt burden of the FCI is crossing Rs 3 lakh crore, and could cause financial crisis in food management system. 

Sugar sector is also in trouble as no market mechanism is followed

  • In case of sugarcane, the government announces ‘Fair and Remunerative Price (FRP)’ to be paid by sugar factories. Uttar Pradesh announces its own ‘State Advised Price (SAP)’.
  • This has only created a mess in the sugar sector.
  • We have cane arrears of more than Rs 8,000 crore, with large surpluses of sugar that can’t be exported, making this sector globally non-competitive.
  • Unless pricing of sugarcane follows the Rangaranjan Committee’s recommendations (similar to milk pricing), these problems of sugar sector will persist.

New farm laws seek to bring market mechanisms into Indian agriculture

  • The Indian democracy was at full play over the passage of the new farm laws.
  • While the government hailed it as historic decision, opposition parties branded it as anti-farmer.
  • Yet, there is no doubt that ultimately all parties want farmers’ incomes to improve.
  • Those opposing the new laws want to achieve higher incomes through higher and more effective MSP (minimum support prices).
  • On the other hand, the government, by liberalizing agriculture, is offering greater choice through markets, without demolishing the existing system of MSP.

In today’s India with agri surplus, there is an important role for market mechanisms:

  • Minimum Support Price (MSP) is the creation of scarcity era of mid 1960s.
    • MSP is an assurance (not legally binding) by the government to the farmers that it will buy at MSP if market prices go below MSP.  
  • But, Indian agriculture has turned around from scarcity to surplus.
  • The policy instruments of dealing with shortages are different than dealing with surpluses.
  • In a surplus economy, unless we allow greater role of markets and be demand-driven, the MSP route can spell financial disaster.

Market and MSP can work together:

  • The new reforms are only about only changing the mix of how much of pricing should be state-supported and how much market-driven.
  • The farm laws are trying to increase the relative role of markets without dismantling the MSP system.
  • 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.

Milk sector has boomed by market pricing:

  • The most important commodity of Indian agriculture is milk, whose value is more than the value of rice, wheat, and sugarcane combined.
  • Pricing of milk is not government controlled: 
    • Milk doesn’t have MSP and doesn’t go through a mandi system, paying high commissions, market fees and cess.
    • In 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.
    • Milk does not have MSP. Milk cooperatives like AMUL competes with private companies like Nestle.
  • Consequently, milk sector is growing fast:
    • The milk sector has been growing over years at a rate that is 2-3 times higher than the growth in rice, wheat and sugarcane.
    • Today, India is the largest producer of milk (187 million tonnes), ahead of the US which ranks second with a milk production of around 100 million tonnes.

New market mechanism will lead to boom in agri commodities:

  • After the new farm laws, in the next 3-5 years, hundreds and thousands of companies will be encouraged to build efficient supply lines somewhat on the lines of milk.
  • It will be for different agri-commodities, in states where they find the investment climate right, be it with farmers producer organisations (FPOs) or through aggregators.
  • These companies will help raise productivity, quality, safety of the produce.

Way ahead:

  • For farming to be financially sustainable and even see growth, market mechanism are necessary to get out of the mess seen by rice, wheat, and sugar which are MSP- and SAP-dominated.
  • However, in the medium to long term, even in market conditions, crop price by itself has 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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