On December 2, 2018, PTI published a story on Sanjay Sathe of Nashik district. Sathe had grown 750 kg of onions this season. He was offered a rate of ₹1 per kg in the wholesale market when he tried selling them. He finally managed to negotiate a deal where he was paid ₹1,064 for 750 kg. In protest, Sathe donated this money to the Prime Minister’s Disaster Relief Fund. Oh, and he had to spend an extra ₹54 to send this money through a money order.

I live in Mumbai, a few hours’ drive from Nashik. The supermarket I buy onions from is currently selling them at ₹28 per kg. That’s what the consumer in Mumbai pays for a kilogram of onions, while the farmer in Nashik is unable to sell his produce for even ₹2 per kg.

Someone somewhere is making a huge profit of 1,900 per cent on this transaction. It is clearly not the farmer. Even if the retail selling price of onions was ₹10 per kg, the margins made by the supply chain (or what ensures that the produce of the farmer reaches the end consumer) would be way too high.

This story is at the heart of what is wrong with farming in India. The supply chain makes too much money and the farmers are not getting adequately compensated for what they produce. Dear reader, you might come around and tell me, “But that’s the way the market is currently operating. If it means onions selling at ₹1.4 per kg, then so be it.” The trouble with this argument, as I explained earlier, is that someone along the supply chain through which the farmer’s produce is reaching us is making a profit of 1,900 per cent. And that is atrocious. This is not how any market works.

While Sathe’s case is an extreme example, there is enough data from the rabi marketing season of 2018-19 and the kharif marketing season, which is currently on, to show that farmers are not getting an adequate price for what they produce.

The evidence

The government declares the minimum support prices of 22 agricultural crops. The 14 crops for which the government declares an MSP during the kharif season (i.e. the cropping season from July to October) are paddy, jowar, bajra, maize, ragi, arhar, moong, urad, groundnut-in-shell, soyabean, sunflower, sesamum, nigerseed and cotton. The six crops for which the MSP is declared during the rabi season (i.e. the cropping season from October to March) are wheat, barley, gram, masur (lentil), rapeseed/mustard and safflower, and two other commercial crops, jute and copra.

Over the years, the government has primarily bought rice and wheat from the farmers directly at the MSP.

Interestingly, when things first started in the late 1960s, the government used to declare a procurement price as well as an MSP. The MSP acted as a floor price. The assurance was that the price of a commodity would not be allowed to fall below a certain level, even if there was a bumper crop. Over and above this, there was the procurement price at which the government actually bought rice and wheat through the Food Corporation of India and other state procurement agencies for distribution through the PDS. This price was normally higher than the MSP but lower than the market price.

This basically ensured that the market, and not the government, set the price for rice and wheat. This system was done away with in 1975-76, when the present system of declaring only one price (the MSP) was started.

The irony is that the MSP, over the years, has become the maximum price that a farmer is likely to earn on his produce. The government largely buys rice and wheat directly from the farmers. But in recent years, the government has also bought some amount of pulses, oilseeds and cotton directly from the farmers.

Given the fact that the government buys only five out of the 22 crops for which it announces an MSP, its ability to influence market prices of agricultural crops remains very limited.

Other than this, the direct buying of a few crops is limited to a few parts of the country. Take a look at Table 1. Table 1 basically lists the details of the total amount of wheat grown in a state during the rabi season and the total amount procured by the government through the Food Corporation of India and other state procurement agencies during the rabi marketing season (April to June primarily) of 2017-18 and 2018-19.

Table 1: Is the government really buying wheat? (Source)

Table 1 makes for very interesting reading. The two states where procurement operations ensure that a bulk of the rice and wheat are bought by the government are Punjab and Haryana. The reason for this lies in the fact that the Green Revolution of the mid-1960s started in this area. And given this, the procurement operations of the government in these states are pretty good.

Now take a look at Uttar Pradesh, which produces the highest amount of wheat in the country. Barely 16 per cent of the production was procured by the government during the last rabi marketing season. Basically, the weak procurement operations of the government ensure that it has very limited ability to set prices across the length and breadth of the country.

Look at Table 2, which basically lists the proportion of days during the rabi marketing season between April and June earlier this year, where the farmer got a price for wheat which was below the MSP.

Table 2: Weak wheat. (Source: Price Policy of Rabi Crops, The Marketing Season of 2019-2020)

As can be seen in Table 2, only farmers in Punjab and Haryana were able to get a price which was equal to the MSP. The MSP has thus become the maximum price that a farmer can expect, instead of the minimum support price that it was originally supposed to be.

If we look at the data for other crops during the rabi season, the results aren’t very different. In fact, they are worse. A similar sort of story played out for other major rabi crops like gram and barley. Take the case of barley. As the document titled Price Policy of Rabi Crops points out: “During April to June 2018, market prices in major producing states like Madhya Pradesh and Rajasthan, which contribute about 64 per cent of total barley production in the country, ruled below MSP for most of the days.”

See what happened in the case of gram. Pulses are another major crop grown during the rabi season: 65 per cent of the total pulses produced in the country is produced during the rabi season. Of all the pulses grown during the rabi season, gram accounts for 72 per cent of the total production.

Now take a look at Table 3. It basically lists out the number of days in various states when gram was sold at a price which was lower than the MSP.

Table 3: Nothing pulsating about pulses. (Source: Price Policy of Rabi Crops, The Marketing Season of 2019-2020)

The same story plays out in the case of pulses.

Finally, let’s also take a look at what happens in the case of rice. Table 4 basically lists the largest rice producing states during the kharif marketing season of 2017-18 (primarily the period between October and December 2017) and the proportion of that production procured by the government.

Table 4: What’s up with rice? (Source)

Table 4 clearly shows that in some states like Punjab, Haryana, Andhra Pradesh, Telangana and Odisha, a large amount of rice produced by the farmers is procured directly by the government. But in some states, it isn’t. West Bengal is the largest rice-producing state in the country. Barely any rice gets procured by the government in the state. The same is the case with Bihar and Assam. Why is this so?

When we look at the kharif marketing season of 2018-19, which is currently on, things don’t look too good either. A report in The Wire points out that in October 2018, the average price of 10 out of the 14 commodities—the MSPs for which are announced by the government—was lower than their MSP.  Also, farmers have had to face price pressures while selling vegetables as well.

The conclusion

So, what is the solution to this? Before we get into that, the data presented up until now clearly tells us that the ability of the government to influence prices of agricultural crops (even the ones that it buys) is basically very limited. Just announcing a higher MSP does not mean anything. Does this mean that the government should be buying more and more crops at the MSP? The answer is no, simply because it is logistically not possible. Over and above this, it will be a financial nightmare if the government proceeds along these lines.

Also, the MSP leads to other problems. There is no reason for a state like Punjab, which produces the third highest amount of rice in the country and barely consumes any, to be producing so much rice. The only reason the state produces so much rice is because almost all of it (close to 92 per cent) is bought by the government. Rice is a water-intensive crop and growing rice in a semi-arid region isn’t the best thing happening when it comes to the environment.

Over the years, by not diversifying the crop procurement operations, the government has basically ended up promoting inequality across the country. This is a great example of the law of unintended consequences at work. Also, the fact that the MSP is not the solution is clear from the fact that more than 50 years after it was first launched, it hasn’t worked as a policy. More of MSP would basically mean doing the same thing and expecting a different result. The world doesn’t work like that.

Another quick-fix that political parties have latched on to is to waive farmer loans. Other than promoting a bad credit culture, this does not do anything to solve the basic problem of the farmer not being compensated adequately and the supply chain making too much money.

One thing that the government clearly needs to do is to get to rid of the various APMC acts across the country. The laws which force the farmers to sell only to certain institutions and not to others need to be done away with.

As Ashok Gulati, Tirtha Chatterjee and Siraj Hussain write in a research paper titled Supporting Indian Farmers: Price Support or Direct Income/Investment Support? published in April 2018: “Wisdom lies in thinking rationally now, and support farmers through less distortionary policies. It may be through investing heavily in marketing infrastructure, storage and food processing, changing the APMC Act to allow direct buying from farmer producer organizations (FPOs) bypassing the archaic mandi system, or direct income (investment) support (DIS) on per hectare basis, as recently announced by Telangana and Karnataka.”

The problem is: do the various state governments want to do all this, and more? The government of Maharashtra recently introduced and then withdrew a bill which basically would have removed all farm produce from the purview the state’s APMC mandis. The government gave in to pressure from the commission agents, traders and labourers employed in these mandis.

No government seems to have the balls when it comes to tackling organised groups, be it the bank unions of public sector banks, the unions of Air India, the unions of many public sector enterprises which aren’t doing anything of value, or the APMC mandis.

The same story is repeated everywhere.