Deficiency price payment  may be way forward as agri market forces are better placed to judge the value of agir products

Addressing a conference on ‘Getting Agricultural Markets Right’ (July 6, 2022), Ramesh Chand, who is a Member of the Niti Aayog, proposed the adoption of deficiency price payment system (DPPS) as an alternative to the existing dispensation of procurement of crops from the farmers at minimum support prices (MSPs).

What is the problem with the MSP-based regime? How will DPPS help in alleviating it? Under the existing system, agencies of the government like the Food Corporation of India (FCI) buy agri-produces such as wheat, rice/paddy, coarse cereals, from farmers at the MSP and distribute at a subsidized price of `1/2/3 per kg through a network of fair price shops, known as the public distribution system (PDS), to meet the needs of India’s poor.

The excess of MSP plus handling, storage and distribution cost (HSD) over `1/2/3 per kg is paid as subsidy. Based on the recommendation of the Commission for Agricultural Costs and Prices (CACP), the government fixes MSP of 22-23 crops grown in both Kharif and Rabi seasons. However, purchases by the FCI and other state agencies are restricted primarily to rice and wheat. The other important crops are pulses and oilseeds – these are procured by the National Agricultural Cooperative Marketing Federation of India Ltd (NAFED).

The overarching objective of this dispensation is to ensure ‘food security’ of over 800 million people by actually making grains available to them at ‘affordable’ price. That this is done under a law enacted by the Parliament viz. the National Food Security Act (NFSA), 2013 shows the importance attached to it. Giving an attractive price to the farmer for her crop was another but this complement the main objective.

The MSP regime was introduced in the 1960s vide an executive order for encouraging farmers in the ‘Green Revolution’ region in Punjab, Haryana and western Uttar Pradesh for higher production of rice and wheat. While the intent in those days was to address food shortage, today the country has a food surplus.

Despite this fundamental change, the Government continues with the MSP regime but with a big difference. Whereas, earlier the State agencies used to procure only the quantity required for the PDS plus a ‘strategic buffer’, now there is a total disconnect.

Today, the Government runs an open-ended procurement scheme whereby the agencies buy the highest possible quantities at ever-increasing MSP. The ruling establishment is driven by a sense that in elections, it will be judged on the basis of ‘how much it is purchasing from the farmers’ and ‘the quantum of hike in MSP allowed during its term’. The drive is pursued with missionary zeal not even caring to assess whether the food thus procured is needed or not.

The system has given rise to a myriad of problems viz. build up of stock far in excess of the agencies capacity to store; monumental wastages inefficiencies and high cost; large scale diversion and misuse; unsustainable increase in subsidy and added risk of violating India’s commitment under the WTO. This is when only 6 per cent of the farmers get MSP benefit covering a select few crops, even as the agencies procure 30 per cent of wheat and rice production.

There is clamor for extending coverage to all the 22-23 crops and ‘all’ farmers who have surplus produce to sell. If these demands are granted and that too ‘guaranteed by law’ (as sought by farmers during their year-long protest), this will be a sure invitation to economic disaster and financial bankruptcy of the Central Government.

Under the DPPS, the Government merely compensates farmers for the difference between the MSP for select crops and the price realized from selling in the mandi (a commonly used phrase for the ‘local market’). Unlike the existing system wherein the State agencies actually purchase farmers’ produce at the MSP, under the proposed system, they need not.

While Madhya Pradesh had experimented with the DPPS on select crops earlier, Haryana is in the process of rolling it out for a few commodities. Ramesh Chand wants the Centre to consider going for pan-India rollout.

Considering that the Government will continue to purchase agri-produce to meet the requirements of the PDS, to that extent, the DPPS will have no relevance. It will substitute only the quantity that the agencies are currently buying in excess of what is required for the PDS or items such as pulses and oilseeds, they (for instance, NAFED) purchase as price support to the farmers.

To the extent of substitution of these purchases by deficiency price payments, the Government will save money as it doesn’t have to incur handling and carrying cost (H&CC), besides avoiding the loss from selling grains in the open market under OMSS (Open Market Sale Scheme) at a price lower than the MSP. For instance, if for a kg of wheat MSP is `20 H&CC Rs 10 and the agency sells for `15, then the savings would be `15 [10 + (20 – 15)].

Having decided in principle to make deficiency price payment, the Government will have to give it to all farmers and cover all crops unlike the existing system wherein MSP support is available ‘only to those from whom it buys’. The higher expenditure due to substantially expanded coverage under DPPS will more than offset the savings due to non-purchase. The net result: even under the proposed system, ballooning subsidy outgo can’t be avoided.

Under the existing regime, MSP is calculated using an All-India average cost of cultivation (plus 50 percent of the cost towards profit) even as the cost incurred by individual farmers could vary depending on the location. This results in fortuitous gains for farmers whose actual cost is less than the average and vice versa.

If under DPPS also this MSP (as notified by the Centre) is compared with local mandi price to arrive at the deficiency amount payable, the anomaly will remain. It could be addressed by calculating location specific MSP and comparing the same with the corresponding mandi price. This poses a huge challenge in terms of data collection, analysis and implementation.

Whether it is MSP-based regime or DPPS-, both are open-ended, susceptible to ever increasing subsidy burden and vulnerable to violation under the WTO.

What is the way forward? It is impossible to have a viable state support system which takes care of all farmers and all crops. It should be left entirely to the market forces. PM Modi should create an eco-system in which farmers have multiple options to sell (this will require resurrection of the three Central farm laws) and fetch a remunerative price. If need be, the Government can give direct income support to poor farmers. The assistance given under PM Kisan Samman Nidhi (currently, it covers all farmers) may be restricted to them only with enhanced allocation.

This system will be free from maladies afflicting MPS/DPPS and India won’t be questioned at the WTO either. As for the food security objective, the Government can purchase from the market quantity required for the PDS besides ‘strategic buffer’. Ideally, it may give subsidies directly to the beneficiary and let the latter buy her needs from the market. For instance, for a kg of wheat, it can transfer `28 to her account so that she can pay the full price of `30, spending `2 from her pocket.

(The writer is a policy analyst. The views expressed are personal.)