In all probability, the Government must not tread the path of giving legal backing to MSP. Already, it is struggling to find resources for food subsidy under NFSA. An alternative path is to find platforms where farmers can sell their produce
On November 30, 2018, tens of thousands of farmers congregated in the national capital to protest against their financial distress arising out of non-remunerative price for their agricultural output and ever-increasing farm debt burden. They wanted a special session of Parliament to discuss their problems and demanded the passage of two laws (i) to guarantee Minimum Support Price (MSP) for all crops based on the recommendations of the National Commission on Agriculture under MS Swaminathan (2006) and (ii) ‘one-time’ farm loan-waiver. Truly speaking, the enactment of both these laws can be fiscally catastrophic. To understand the implications, let us look at how MSP is fixed and its connect with subsidy.
To incentivise food production and to make it available at affordable price to the target beneficiaries (mostly poor), the Government had already directed State agencies, such as the Food Corporation of India (FCI), to procure produce from the farmers at MSP and arrange its supply through the public distribution system (PDS), at a price much lower than the actual cost of procurement. The differential amount was then to be reimbursed to the agencies, as subsidy.
Under the National Food Security Act (NFSA), beneficiaries are allowed to get five kg of cereals per person, per month. Besides, 81 crore people are provided wheat at the rate of two rupee per kilogram, rice at the rate of three rupee per kilogram and coarse cereals at the rate of one rupee per kilogram. With low sale price covering barely one-tenth of the cost and the NFSA requiring this network to supply an estimated 60 million tonnes of subsidised grains per year, it entailed a food subsidy of Rs 140,000 crore (2017-18). In addition, Rs 35,000 crore was to be spent on price support for pulses and oilseeds.
With the inclusion of over a dozen crops under the MSP and using the methodology recommended by Dr Swaminathan — viz 50 per cent profit over cost of production (paid out expenses or A2 plus family labour) for its determination, which has already been implemented by the Government — during the current year, expenditure on food subsidy is already expected to cross Rs 200,000 crore.
But farmers want C-2 cost (in addition to A2+FL, and this includes imputed cost of owned capital and owned land) to be used for calculation of 50 per cent profit. This is illogical. They have already been provided for return on owned land and capital under C-2. To give profit over and above this would be fortuitous.
Yet, if the Government recalculates on this basis, it will lead to even sharper increase in MSP and correspondingly, in food subsidy. On top of this, if the MSP, too, gets the legal backing, implications will be mindboggling.
Apart from covering farmers, who sell their produce to State agencies (for meeting requirements of the PDS), those selling their output in the marketplace will be entitled to claim reimbursement for the shortfall in realisation (mandi price) vis-à-vis the MSP. Even subsistence/marginal farmers, who produce food for self-consumption and, hence, have nothing to offer for sale, will qualify for reimbursement. In short, almost the entire food production of 285 million tonnes (target for 2018-19) will come under legally-protected MSP.
These reimbursements on food sold/consumed outside NFSA/PDS, or over 200 million tonnes, will impose an additional burden of at least Rs 100,000 crore (assuming shortfall of a bare five rupee per kg in market price vis-à-vis MSP). This will be over and above Rs 200,000 crore currently being spent for distributing 60 million tonnes under the NFSA, plus the price support for pulses and oilseeds.
Going by the magnitude of loan-waiver promises being made to the farmers in the States that have gone to polls in recent times, the second legislation for a one-time waiver to farmers’ debt will cost the exchequer more than Rs 200,000 crore. Already, the Centre is struggling to find resources for food subsidy under the NFSA with dues pending to the tune of Rs 200,000 crore to FCI. One shudders to think of a scenario whereby it will be required to cough up an additional amount of at least Rs 300,000 crore next year, contingent upon passage of the two laws.
This will completely destabilise the budget and play havoc with the Government’s fiscal consolidation drive. Its ability to fund development works, including investment in irrigation, rural roads, markets et al, will be seriously undermined. This will also affect the farmers’ ability to increase production and sell, leading to a further drop in income. It will be a case of giving from one hand and taking from the other.
A legally-backed MSP will be suicidal. The Government should avoid treading this path. The genesis of low price realisation by farmers lies in them being forced to sell the produce at notified agriculture produce market committees. These are cartelised and mostly controlled by powerful traders who have connections with politicians and bureaucrats. They pay less to farmers and rake in moolah by selling their produce to consumers at a high price.
Instead of using the taxpayers’ money to compensate farmers (that will only help traders continue with their loot), the problem has to be tackled at source. Focus should be to dismantle these cartels and invest heavily in establishing alternative platforms to enable them sell their produce. Removal of restrictions on exports and unencumbered foreign direct investment in retail are other potent policy incentives that will help them realise better price. Will Modi crack the whip?
(The writer is a freelance journalist)
