Agri-market reforms will force review of MSP rationale

G Chandrashekhar | Updated on June 24, 2020 Published on June 24, 2020

Allowing farmers to sell in private markets does not guarantee they will receive a fair price. If the government thinks MSP is a fair minimum price growers must receive, then it must be ready to defend it

The government has got trapped in the chakravyuh or labyrinth of its own making in the form annual hikes in minimum support price for specified crops. This is because of the mismatch between its intention (price for growers) and its lack of ability to support farm-gate prices across the country.

Season after season, there is a routine hike in MSP (minimum support price), ostensibly to cover increase in input costs and so on; but the hike is in complete disregard of market conditions and without having an adequate institutional mechanism to defend the MSP. After all, MSP is a sovereign guarantee given by the government to growers, and must be defended all the time.But this does not always happen.

Procurement price

Rice and wheat are seen as some kind of exception. But remember, there is massive government purchase (procurement) of the fine cereals, often 25-35 per cent of the output to meet the needs of public distribution and for creating buffer stocks. In other words, rice and wheat enjoy some kind of procurement price support rather than MSP.

Growers of these fine cereals are free to offer the grains for procurement or sell it in the open market if the latter offers a better rate. Government agencies such as the Food Corporation of India undertake procurement of rice and wheat.

But even this government-backed procurement of rice and wheat is utterly lopsided. A large number of growers outside a few frontline States do not receive the assured procurement price. While the government’s fiscal burden is rising all the time because of excessive procurement, there is little equity and inclusiveness in procurement for the country as a whole.

The recently announced agri-marketing reforms, including setting up of private markets in addition to APMC (Agricultural Produce Market Committee) markets, are surely a welcome step in allowing more marketing freedom to growers. The private markets are expected to be competitive alternative marketing channels. But they may also prove to be a challenge for growers. Will the private markets be less-exploitative and help deliver better prices to growers than at present? Doubts remain.

While APMCs will operate within the physical boundaries of notified areas, private markets or alternative trade area may be warehouses, silos, factory premises, cold storage or similar facilities. Importantly, new players are allowed to set up private markets without any licensing or regulatory oversight.

In case of any dispute with respect to APMC market pricing, the grower can approach the district administration for redressing his grievance. What kind of dispute resolution mechanism will be put in place for private markets and how soon and how effectively the disputes will be resolved is anybody’s guess.

Be that as it may, MSP is likely to go for a toss with numerous private markets. There is no guarantee growers will receive the MSP in the private markets which admittedly is not very different from what it is even today. Where there is no effective government procurement mechanism, growers will be forced to sell at APMC mandis or private markets where they can be exploited with no guarantee of a fair price.

Relevance of MSP

So, that brings us to the logical question: Is MSP outliving its utility and what’s the purpose of declaring MSP season after season, if it cannot be enforced? MSP has become a mere palliative for a vast array of farmers without delivering any tangible benefit. Over the years, declaration of MSP season after season has become a farcical exercise.

Obviously, there is a strong need to review the rationale for MSP. It must help growers make decision relating to planting. If the government thinks MSP is a fair minimum price growers must receive, then it must be ready to defend it by ensuring that price is not allowed to fall below MSP for which institutional arrangements have to be beefed up

Importantly, there is little realisation within policy-making circles that price is a function not only of supply but also demand. Except for its obsession with rice and wheat, New Delhi has done little in recent decades to boost demand for a range of crops including pulses, coarse cereals and oilseeds.

Given that our per capita availability of pulses, coarse cereals and edible oil is still low, boosting demand will automatically provide a price impetus for domestic crops. At the same time, excessive import such as that of edible oil that depress domestic price should be curtailed. We need end-to-end solutions.

The writer is a policy commentator and agriculture markets specialist.

Published on June 24, 2020
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