How feasible is MSP as a legal right? The good, the bad and the impossible

In her new book Cogs and Monsters—What Economics is and What It Should Be, the British economist Diane Coyle uses the word nuance thrice.

She writes that “politics and nuance are strangers”. And that “the eye of the public is caught, by confident statements of extreme views [emphasis added], rather than by modest or nuanced analyses of complicated situations”.

And finally that “there are too few economists who bother to jump into the bear pit of public debate,” due to the fact that “nuance dies in this arena”.
All this and more are true when it comes to the issue of the demand for the minimum support price (MSP) guarantee on agricultural crops. Given that the issue is as political as it is, all the nuance has gone out of the window and confident statements are being made on both sides.

The few economists who have jumped into the debate are already in support of one side, the farmers’ unions which are demanding the MSP guarantee or the central government which will have a tough time furnishing it.

This piece is an attempt to introduce some nuance into the discussion that is currently happening on MSP guarantees.

The background

On November 19, prime minister Narendra Modi announced that the three farm laws which were passed in September 2020, and against which a section of the farmers had been protesting, would be withdrawn. The Parliament repealed the laws through a voice vote on November 29.

The hope was that with this, the farmers who have been protesting on the borders of Delhi for months would wrap up and go home. But that doesn’t seem to be happening. Rakesh Tikait, the leader of the Bhartiya Kisan Union and the Samyukta Kisan Morcha, a federation of farmers and other outfits which has been protesting against the farm laws, recently said in Mumbai: “The Centre should bring a law to guarantee MSP to farmers.” Tikait has also warned of a major stir on Republic Day if the MSP guarantee law is not brought in.

So, the question is should the government introduce a guarantee on MSP on agricultural crops? Before we try and answer that, it’s important to understand what exactly is being demanded.

What is minimum support price?

Every year, the central government announces a minimum support price or MSP for 22 agricultural crops. It also announces a fair and remunerative price (FRP) for sugarcane, which is basically like MSP. In theory, the idea is that the farmers growing these crops should receive a minimum price for what they produce. But that doesn’t happen, at least not all the time, simply because the government directly buys only a few agricultural crops in significant amounts to be able to make a difference to the price at which they are being sold. The crops which the government directly buys from the farmers in significant amounts include rice, wheat and cotton.

Of course, there is no legal or statutory backing for even this and hence, the farmers cannot demand the MSP as a matter of right. If the government wants, it can practically stop buying crops at the MSP tomorrow morning. The fact that it will not do something like that is primarily because there will be political repercussions for the same.

The MSP guarantee

There are basically two ways to go about guaranteeing an MSP on agricultural crops. The first is the government upping the procurement of other crops than just the three crops that it primarily buys. The second way is to force the private trade to buy crops at the MSP.
Let’s look at the first way first.

So, what happens if the government starts buying more crops at MSP? It will need more money to do so. There are those who believe that this will drive the government towards bankruptcy. The agriculture economist and NITI Aayog member Ramesh Chand told the Mint that “such interventions are fiscally ruinous”.

Anil Ghanwat, a member of the panel set up by the Supreme Court to study the farm laws and the president of the Shetkari Sanghatana, the Maharashtra-based farmers' union founded by Sharad Joshi, put it more simply when he said that a legal guarantee will drive the country to bankruptcy.

Journalist Harish Damodaran, writing in the Indian Express, put the cost of providing a legal guarantee on the marketed surplus of the crops for which an MSP is announced at Rs 5 lakh crore. The marketed surplus of a crop is essentially the total production minus the amount retained by the farmers for self-consumption and meeting other needs.

Damodaran further explained why the actual cost is likely to be even lower than Rs 5 lakh crore because of two reasons. One the government will not just keep sitting on what it buys directly from the farmers at the MSP, it will sell it on.

And two, the government doesn’t necessarily have to buy all the marketed surplus. Just buying a fourth of it will ensure that the market price will be lifted above the MSP level in case of most crops, Damodaran wrote.

So, going by this math, a legal guarantee on MSPs seems like a doable thing and won’t be fiscally ruinous. Nonetheless, as I shall explain, talking just about the money side of things before anything else, is like putting the cart before the horse.

Allow me to explain.

1) Take the case of rice and wheat,the two crops the government primarily buys at the MSP. This started in the 1960s to promote the green revolution and encourage the farmers to grow high-yielding wheat,in order to reduce India’s dependence on imported wheat. So, there was a certain logic to it.

But more than five decades later, the procurement of rice and wheat remains limited to certain parts of the country. The document titled Price Policy for Rabi Crops﹘The Marketing Season of 2022-23, published by the Commission for Agricultural Costs and Prices (CACP) of the Ministry of Agriculture and Farmers Welfare, points out, in the context of wheat: “While procurement in Punjab, Madhya Pradesh and Haryana is much higher than their share in total marketed surplus, wheat procurement in Uttar Pradesh, Rajasthan, and Bihar is much lower than their shares in total marketed surplus and production.”

Wheat bought by the government through the Food Corporation of India (FCI) is sown during the winters, that is the rabi season. The same story plays out with rice which is sown primarily during the monsoons, that is the kharif season.

As the document titled Price Policy for Kharif Crops﹘The Marketing Season of 2021-22, published by the CACP, points out: “In some rice producing States like Punjab, Haryana, and Telangana, more than 80 percent of marketed surplus of rice is procured by government agencies, which is primarily triggered by open-ended procurement policy.” Procurement in West Bengal and Uttar Pradesh, the two largest rice producing states, was low at 11.1 percent and 11.8 percent of the marketed surplus, respectively. This is because the procurement operations are much better organised in states like Punjab and Haryana.

The point I am trying to make here is that more than five decades after MSP became a norm, the procurement operations for two crops are limited to a few states. Now imagine the government trying to build procurement operations for other crops, even at a similar scale that exists for rice and wheat. It simply doesn’t have the capacity to put in place something like this, all across the country.

Hence, the issue is not about the ability of the government to spend money, it’s more about its ability to put in place a system which they can then use to spend money, procure crops and guarantee an MSP.

2) Building a procurement system is one part of the overall problem. Then there is the case of storage. As of April 1, 2021, the storage capacity of FCI and other state storage agencies was around 818 lakh tonnes. The total stock of rice, wheat, unmilled paddy and coarse grain stood at around 883 lakh tonnes. Clearly, the government does not have enough storage capacity. Now if MSP becomes the norm, more rice and wheat are likely to land up with the government. It will not have an adequate storage capacity for the same and it will have to build or acquire that capacity.

3) Let’s assume that the government is able to build and/or acquire that capacity. What end will it serve? As of October 1, as per the food stocking norms, FCI needed to maintain a strategic and operational stock of rice and wheat amounting to 307.7 lakh tonnes. It had more than double at 721.8 lakh tonnes. Clearly, the government is already acquiring more rice and wheat than it needs to fulfil its obligations under food security and other laws, and doesn’t know what to do with what’s remaining. Also, eating habits have changed over the decades. As incomes have gone up, people have moved towards consuming lesser cereal per capita and more proteins and milk.

4) Other than the storage system for rice and wheat, adequate storage systems for other crops will also have to be built, something that the government lacks currently. This will again raise questions about state capacity.

5) Once the government has built a procurement and a storage system, it needs to build a distribution system for all the crops it will end up buying under the MSP guarantee. This distribution system will have to keep in mind different eating habits of people across different parts of the country and even different parts of a state. It is very difficult for a centralised authority to be able to build such a system which captures all this information.

If the government simply unloads what it buys at the MSP on the open market, it can depress prices. Take the case with oil seeds. As the document titled Price Policy for Kharif Crops points out: “Oilseeds procured under the price support scheme are sold in open market at a discounted price, thereby creating disincentive for private players to procure directly from farmers.”

As I said earlier in this piece, talking about the money required to guarantee MSPs is putting the cart before the horse. Even if the money is available, there are other problems which remain very difficult for the government to surmount.

Private sector buying crops at MSP

The other way of guaranteeing an MSP is to force the private trade to buy crops at the government-determined price. In fact, the Maharashtra government tried this in 2018. The changed law allowed the government to imprison traders and/or impose a fine on them of up to Rs 50,000. As the economist Ajit Ranade wrote in a column in the Mumbai Mirror in September 2020: “The state government told traders that they had to pay farmers MSP for toor dal. The traders simply boycotted, despite threats of imprisonment.”

In fact, there is a better example that we can take here, which is that of sugarcane. As explained earlier, the central government announces a fair and remunerative price (FRP) for sugarcane. The private sugar mills need to buy the crop sold to them by farmers at the FRP and make this payment within a period of 14 days of buying sugarcane. This is as per the Sugarcane (Control) Order, 1966.

But despite this, sugarcane arrears remain and payments are rarely made within a period of 14 days. There are several reasons for this. One is that sugar is sold by the mills throughout the year. Clearly, the private mills have a working capital problem, where their expenses are bunched together, but the income is spread out.

However, there is a bigger problem in this case. As per the document titled the Price Policy for Sugarcane﹘2021-22 Sugar Season published by the CACP, during 2019-20, despite a significant fall in sugar production, the arrears that sugar mills owed to sugarcane farmers stood at Rs 10,342 crore. This was as of September 30, 2020. Sugar prices were depressed due to subdued demand and surplus stocks, both domestically as well as internationally. The arrears have been going up over the years. In 2019-20, they amounted to Rs 10,342 crore or 13.6 percent of the price payable. In 2016-17, they had stood at Rs 2,001 crore or 3.5 percent of the price payable.

What adds to the problem is the fact that over and above the central government announced FRP, the state governments announce a state advised price, which is higher than the FRP. This makes the production of sugar unviable, given that the government doesn’t control the market price of sugar.

In order to do that it will have to start buying sugar on a very large scale, like it does with rice and wheat. (I would suggest googling up this great story about what happened when the American government started buying milk from farmers in the late 1970s. It then had to start buying up cheese as well. Udit Mishra writing in the Indian Express provides a great summary. This also explains in a way that it’s not just about the limited state capacity of the Indian government. It’s also about how economics works).

Further, it is worth remembering that sugarcane is just one crop, where two states, Uttar Pradesh and Maharashtra, have around 60 percent of the total sugar producing capacity in the country. Now imagine if something like this is to be done for all other crops for which MSP is announced and all across the country. This will practically mean nationalisation of the wholesale trade, which is a terrible idea.

The environment

MSP is a product of the 1960s, when India did not grow enough cereals to feed the country and farmers had to be encouraged to do so. But over the years, this has had an impact on the environment in several ways, one is the depleting water level in Punjab and Haryana.
Take a look at the following table, which highlights the cropping pattern in Punjab, over the decades.

In the last six decades the cropping pattern of Punjab has changed totally. Punjab barely grew any rice paddy in the early 1960s and that was perfectly understandable given that it is a semi-arid region and growing rice needs a lot of water.

Nonetheless, in 2019-20, rice paddy was one of Punjab’s major crops, whereas it barely grew any pulses. The irony is that as a state the Punjabis don’t eat much rice, explaining the high marketed surplus of rice that the state has. But they do eat a lot of pulses and barely produce any.

The reason for this lies in the assured procurement of rice by the FCI for the central government. The farmers have been incentivised to grow more and more rice by the government. This can’t be held against them. While it is easy to talk about the market being allowed to operate, we all take the way out if one is available.

Let me explain this in a little detail. As a freelancer I write for a living. I know in advance what I am going to be paid for a particular piece. My payment doesn’t depend on the number of people who end up reading my piece. Any system like that would be extremely disconcerting. That’s the socialist that lives in me.

Getting back to the point. The huge increase in rice cultivation has led to falling water levels in Punjab and the neighbouring state of Haryana. As the document titled Price Policy of Kharif Crops﹘The Marketing Season of 2021-22, points out: “Over-dependence on rice-wheat cropping system in Punjab and Haryana due to assured procurement policy has led to serious problems of groundwater overexploitation, soil fertility depletion, plateauing yields and distorted cropping pattern.”

The availability of free power also has had a role to play. As the Price Policy of Kharif Crops document points out: “The share of blocks in overexploited groundwater resources has increased from about 53 percent in 2000 to 79 percent in 2017 in Punjab and from 49 percent in 2004 to 61 percent in 2017 [in Haryana].” Clearly, there is a problem.

So what is the way out?

There are no sure shot solutions here. But multiple things can be done. For more than five decades now, the large farmers of Haryana, Punjab and Western Uttar Pradesh, have benefited from the luck of the geographical draw of the green revolution and the MSP that came along with it. The only quick way to wean off the farmers from growing rice is to gradually reduce the open-ended procurement.

The Commission for Agricultural Costs and Prices has recommended that the central government “should review open-ended procurement policy for rice and wheat and take a policy decision to procure total marketed surplus from small and marginal farmers, who constitute 86 percent of total operational holding and a fixed quantity from farmers having more than two hectare farm size.”

Of course, politically this remains a non-starter. While Punjab and Haryana are small states when it comes to representation in the Lok Sabha, Uttar Pradesh is by far the most important state. Also, large farmers have societal influence way beyond their numbers. Further, no government can be seen to be anti-farmer in the extremely narrative driven politics of this day and age.

So, where does that leave us? One solution has been offered by Prof Sukhpal Singh, Principal Economist, (Marketing) Punjab Agriculture University. As he told the Indian Express: “By legalising the MSP for all crops, the area under [rice] paddy will be reduced and consequently procurement amount will also come down.”

What Professor Singh is effectively saying is that if the government legalises MSP for other crops and starts buying them, farmers will move towards growing other crops, which they will. Nonetheless, there is a basic flaw with this argument. It assumes that the central government is in a position to build the same kind of procurement operations for other crops like it has for rice and wheat in Punjab, and do it quickly. As explained earlier in the piece, there are multiple problems with this.

In fact, the Commission for Agricultural Costs and Prices suggests that “the central and state governments should prepare a special programme for promoting crop diversification in Punjab, Haryana and western Uttar Pradesh”.

So, how will this work? Along with cutting procurement of rice and wheat from these areas, the Commission has suggested that an “additional incentive on a per hectare basis, the difference in returns from rice and alternative crops, may be paid through Direct Benefit Transfer (DBT) to farmers”.

This makes sense, given that the government will offer an income assurance and not a price assurance through procurement that, as explained earlier, will end up creating more problems than it solves. The fear is that a per hectare assurance will end up benefiting large farmers more. But then it is the large farmers who need to start producing crops other than rice in semi-arid ideas.

Income support

The major reason for providing income support to the farmers of Punjab, Haryana and Uttar Pradesh, is to help them diversify away from the water guzzling rice. Nonetheless, this is an idea that needs to be pursued at a national level, given that many farmers are not able to get a remunerative price for what they produce.

Take the case of wheat, its average market prices have “stayed along MSP with little deviations during the last four marketing seasons”. But when it comes to rice paddy the “all-India average market price [has] remained below MSP during the last five marketing seasons” though the “gap between market price and MSP has reduced during the last three seasons”.
When it comes to maize, one of the highest grown crops after rice and wheat, “the market prices…improved during the kharif marketing season 2019-20 and were higher than MSP but this trend reversed in 2020-21 and average market price was 26.4 percent below the MSP”. This is not to say that market prices are always lower than the MSP, but when they are, they do hurt the farmer and farming.

In fact, this volatility leads to what is known as the cobweb effect. If prices for a particular crop in a given year rise at a fast pace then it leads to more cropping in the next year. In the next year, the supply goes up and prices crash. With prices crashing, the cropping goes down and this pushes up prices again in the coming year, leading to consumers getting hurt.
For explanatory reasons, I am stating this a tad simplistically, but price volatility hurts everyone and not just the farmers. Hence, income support makes sense.

Ramesh Chand, the agriculture economist and NITI Aayog member quoted earlier in the piece, made this point in the Presidential Address at the 26th Annual Conference of Agricultural Economics Research Association (India) in November 2018, when he talked about the government making a deficiency price payment to the farmers.

As he said: “An alternative option is to make direct payment to farmers in cash to compensate for the deficiency in price received by [them] as compared to the MSP. This require[s] information on quantity produced and sold by each farmer and price at which [the] produce was sold. To overcome such [a] requirement it is suggested to compensate farmer[s] in each district on [a] per acre basis by using district level estimate[s] of marketable surplus and prices in the harvest season.” He further said that “this is doable as [price] data is reported on [a] daily basis for 3,084 markets in the country”.

Now this is not a perfect system, but something which is good enough. And as the old saying goes, perfect is the enemy of the good.
Before implementing such a scheme, a few pilot projects need to be tried out in different parts of the country, so that the difference between theory and practice can be ironed out.

Other than the price deficiency, there is another major reason for the government to do this. The number of people who have become dependent on farming has gone up. As per the Periodic Labour Force Survey for the period July 2019 to June 2020, around 45.6 percent of the workforce was dependent on agriculture, up from 42.5 percent during the period July 2018 to June 2019. Of course, some of this must be on account of the spread of the Covid pandemic destroying other jobs.

The fact that demand for work under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) continues to remain high this year, tells us that the growth in non-agricultural jobs continues to be weak. The increasing formalisation of the economy also has a role to play here. All this has led to more people being dependent on agriculture.

The Bihar experience

A thing or two can be learned from Bihar, where markets run by Agriculture Produce Market Committees (APMCs) were done away with in 2006. Chintan Patel and I did a deep dive on this a few months back. The point that emerged at the end of it was that a free market doesn’t necessarily work without the right structures in place. An average Bihari farmer was and is too small to deal with any system, government or private.

A November 2019 paper by the National Council of Economic Research points out: “Despite the abolition of the Agricultural Produce Market Committee (APMC) Act in 2006, private investment in the creation of new markets and strengthening of facilities in the existing ones did not take place in Bihar, leading to low market density.”

What did not help was that the “the participation of government agencies in procurement and the scale of procurement of grains continue to be low,” leaving the “farmers…to the mercy of traders who unscrupulously fix lower prices for agricultural produce that they buy from farmers.”
This is where farmer producer organisations (discussed in detail later) can come to the rescue of the farmers, help small farmers achieve some scale and deal with any system in a much better way.

Given these reasons, a deficiency price payment system makes tremendous sense. Of course, this will mean higher expenditure for the central government and it will have to figure out ways of financing it. But it’s a much better way of going about things than guaranteeing MSPs by procuring all crops.

Further, with the government not having to procure all crops, it doesn’t have to build other procurement, storage and distribution systems, though it needs to build a robust information technology system. Guess that should be easier than building physical systems.

What more can be done?

The issue at the heart of it all is to improve the state of farmers by making farming more remunerative, or even otherwise improve their general state. Each of the following points requires a separate piece, but let me go through these points quickly.

1) One reason for bringing in the farm laws was supposedly to let farmers sell outside the government-run mandi system and get into contracts with large buyers and corporations. Nonetheless, as economist Madan Sabnavis wrote in the Mint, this is already in place through the “the Model Agricultural Produce Marketing Committee (APMC) laws of 2003, which over 16 states have implemented to give farmers this right”.

The trouble is that most individual farmers themselves are too small to deal with any system, government or private. As the Price Policy of Kharif Crops﹘The Marketing Season of 2020-21 points out: “As indicated by data received from some states, medium and large farmers occupy a major share in total procurement in the state and share of small and marginal farmers, though improved during last few years, remain low.”

Hence, the need is to encourage more and more farmer producer organisations (FPOs), so that small farmers have the scale to deal with large buyers or even be able to sell their produce in cities. At a personal level I have seen these organisations work and help farmers from outside Mumbai, sell vegetables and fruits in weekly markets across the city.

The Rythu Bazaars across Telangana and Andhra Pradesh are another excellent example of the good that can be done when farmers are brought closer to the end consumers. Both farmers and consumers benefit. More state governments need to be encouraged to take up such programmes.

Further, FPOs can also be used to impart scientific knowledge to farmers. As economist Ajit Ranade wrote in a piece in the Free Press Journal: “Farming needs intellectual and scientific knowledge inputs much more than subsidised water, electricity, credit or fertilisers.” This could include encouraging farmers towards animal husbandry.

2) As mentioned earlier, 45.6 percent of the workforce in 2019-20 was engaged in agriculture. They contributed around 16.7 percent of the total economic output (in nominal terms without adjusting for inflation). Clearly, there are many more people in agriculture than is economically feasible, leading to very high disguised unemployment.

Disguised unemployment essentially means that there are way too many people trying to make a living out of agriculture. On the face of it, they seem employed, nevertheless, their employment is not wholly productive, given that agricultural production would not suffer even if some of these employed people stopped working.

The main way to tackle this is to create adequate opportunities in other sectors so that people move away from agriculture on their own. This happens when private investment in the economy goes up. It has been falling for many years now.

3) The average farm-size in India has been falling over the decades. As the same piece of land has got divided among more and more family members over the generations, the average holding has come down.

Even though quite a few people migrate to the cities, they still keep their farmland. Of course, there are emotional and social reasons for the same. But even for those who want to sell, it’s not easy, given the change in land usage norms that come in. They vary from state to state. This along with digitisation of records is another important factor that needs to be worked upon. It would encourage consolidation of land.

4) A stable government import-export policy from the start of the sowing season to the end of the marketing season for any crop, would be of help. As Kavitha Kuruganti, a farmers’ rights activist, writes in the Wire: “This would ensure that the landing price of any product is not below MSP, where our farmers are likely to be priced out.”

Conclusion

All economics is useless unless the politics and the politicians of the day are in a position to implement reforms, in particular structural reforms. Also, as Coyle writes in Cogs and Monsters: “Structural reform is… inherently political in the sense that it will pit the interests of some groups in society against others.” Clearly, there are farmers who benefit from the current MSP system as it is, though the society at large loses out with its continuation.

Hence, to move towards a workable solution, requires two things, political will and trust between the parties involved, that is the farmer unions on one side and the central government on the other. The trust factor is as important as political will.

Veteran economic journalist Swaminathan Aiyar in a column in The Times of India said that the government was right in pushing through farm laws “without enough consultation and debate”. He justified it by saying that many governments had rammed through laws in the past without much discussion and debate, giving the example of Bihar in the 1970s, where all laws were issued as ordinances, which were re-promulgated once they lapsed, as they couldn’t be passed due to opposition disruptions in the assembly. Previous Congress governments have also been known to ram through legislation.

As Aiyar wrote in his column: “I snigger at the notion that India normally has high procedural standards which the BJP short-circuited.”

This is a classic case of using the past wrongs to justify the present wrongs and given that, it is plainly wrong. At the same time, Aiyar didn’t like the government passing the farm laws in Rajya Sabha through a voice vote.

There is another point here. Economic reforms in India have always been reforms through stealth. Almost no effort has been made to communicate the benefit of reforms to people.

Also, the negative impact of many of these reforms up until now, has been borne by a small set of people. But the low-hanging fruit are now all gone. The structural reforms now needed by the country, like agricultural reforms, are going to impact a large number of people. In this situation, it is important to talk, engage, discuss and debate. This needs time as well as an adequate amount of patience.

Let’s take the case of farm laws in a little more detail. The government brought in these laws through the ordinance route in the middle of a pandemic, then rammed through, first the passage and then the cancellation of these laws through Parliament. In between, it also used the Essential Commodities Act in its original way, despite having amended it.

What does this tell the world at large, including the farmers who have been protesting? That the government doesn’t like to talk and engage.
In my assessment, this has possibly led to a hardening of stance of the protesting farmers and they are unlikely to give up on the MSP demand. Let’s see how this plays out from here on, especially with elections in Uttar Pradesh around the corner.

Vivek Kaul is the author of Bad Money.