27th November 2021
My comment on MSP in Forbes India – and the fuller comments I had made
My comment cited in Forbes India.
“Currently 23 crops are covered by MSP but the government does not have the wherewithal to purchase the output of all these crops,” says Sanjeev Sabhlok, economist and former IAS officer adding that two ideas have been floated by protesting farmers; the scope of crops under MSP to be expanded and a legal guarantee be imposed by which private traders will be compelled to buy at that price.
“A legally guaranteed MSP is not implementable,” he lets on, “Traders would lose if they purchase food grains at a price higher than what the market, including consumers, can bear. The farmer could then be forced to undertake distress sale in the black market or, if traders are jailed for not purchasing at MSP, the food distribution chain would collapse. The government could then be forced to take over the purchase and distribution of the entire agricultural output for these crops or to declare a lower MSP that is closer to the market price. Open-ended procurement of all crops is impossible, not only because funds are not available to do so, but there is no capacity to store such vast amounts of food.”
MY FULLER COMMENT
How feasible and economically viable is a guaranteed MSP for all crops?
The MSP issue has come out of nowhere. It was not mentioned anywhere in the three Acts whose repeal has been recently announced. The erroneous apprehension some farmers had that MSP will be phased out as a result of these three laws has now converted into a demand to create a legally guaranteed MSP.
Currently 23 crops are covered by MSP but the government does not have the wherewithal to purchase the output of all these crops. Two ideas have been floated by protesting farmers: that the scope of crops under MSP be expanded and that a legal guarantee be imposed by which even private traders will be compelled to buy at that price.
MSP was intended for a limited purpose in the beginning: to create a buffer stock against famines. These stocks were then partially distributed through the PDS system. But there are better ways to achieve these objectives. We don’t need 100 million tonnes of foodgrain worth around Rs. 2 lakh crores sitting around, rotting in the rain, being eaten by rats. And while some farmers do benefit on occasion, maybe in a few states, a large proportion of MSP funds are siphoned off by the government’s machinery, including through the PDS system.
MSP plays a distortionary role both in the selection of crops that are produced and on the environment. We don’t need mass production of rice in dry soils through the use of precious groundwater. Open-ended procurement of all crops is literally impossible, not only because funds are not available to do so, but there is no capacity to store such vast amounts of food.
No other country has an MSP system. Instead, different tools (including subsidies) are used to achieve various policy objectives. We need to review MSP’s rationale and identify more efficient ways of achieving the objectives. If poverty removal is an objective, we need to directly transfer funds to the poor. That will be cheaper than the inefficient and corrupt MSP-PDS system. If reducing price volatility is an objective, we need a more efficient and accountable crop insurance regulatory regime.
As far as a legally guaranteed MSP is concerned, it is not implementable. Traders would lose if they purchase foodgrains at a price higher than what the market, including consumers, can bear. The farmer could then be forced to undertake distress sale in the black market or, if traders are jailed for not purchasing at MSP, the food distribution chain would collapse. The government could then be forced to take over the purchase and distribution of the entire agricultural output for these crops or to declare a lower MSP that is closer to the market price.
Many futile attempts to over-ride the price system or economic incentives have been made in socialist India since independence. Sadly, India has never succeeded in breaking the laws of economics. Each such attempt has failed.
Let us just leave the prices free and address policy objectives through more direct policy tools.
Would farmers with large landholding benefit more than landless farmers, with a supposed guaranteed MSP?
There is no doubt that MSP tends to favour the bigger farmer who has the ability to produce a larger surplus. Such farmers can also afford to transport their produce to the mandis and benefit from economies of scale. Smaller farmers have relatively higher transaction costs.
With a legally guaranteed MSP, things can become unpredictable. On the one hand, traders and stockists could shut down their business. On the other hand, farmers (both large and small) could be forced to dump their produce in the black market. Breaking the laws of economics leads to unintended consequences.
MSP policies in India need reform. According to you, what is a more practical way to approach MSP for farmers?
MSP has not been reviewed for a long time. It is not clear why it exists – to build a strategic foodgrain reserve, to reduce poverty, to shield farmers from variability in prices, or to feed a corrupt machine of government? Having multiple objectives leads to inefficiency and lack of accountability.
But MSP is just one part of the agricultural regulatory system that needs review and reform
In India policy is generally made on the run which is why bad policies get imposed and or never get reviewed thoroughly. We don’t have detailed discussion papers, no White Papers that provide the rationale for a policy or reform, consider various options, and conduct a cost-benefit analysis of these options. Sometimes a model bill is prepared but only consulted with the States – not systematically with the public.
A robust policy process could easily have avoided the chaos we have seen with the farm laws. The Modi government should establish robust policy process for making new farm laws.
In the case of agriculture, a Committee should be established with representation of all views. The Committee should prepare a White Paper that considers costs and benefits of options, consults widely and recommends a way forward. The White Paper must consider the total suite of reforms, not in a piecemeal manner like the three farm laws had done. MSP, being a minor part of the India’s regulatory system for agriculture, must also be considered during this process.
Amar Habib has published a book, Anti-farmer Laws, publicly available, which outlines the vast number of laws that need to be changed if the farmer of India is to be treated as a free citizen, not a bonded labourer of the government.
The legislation resulting from such a robust policy process, which involves considerable education, would be acceptable to India’s long-suffering farmers, including any reforms to MSP.
Could a probable guaranteed MSP lead to increase in taxes in the long run?
A guaranteed MSP would presumably be implemented mostly by the private sector so it is unlikely to immediately increase taxes. However, by disrupting the price system, it would have secondary consequences. The government would ultimately be forced to step in to purchase when farmers are unable to sell to traders (who effectively shut down their business). At that stage, taxes or government debt would go through the roof.