PPP model to deliver MSP to farmers

The past few weeks have been witness to a formidable array of arguments advanced for and against allowing foreign direct investment (FDI) in multi-brand retail.

The opposition's case largely rests on the adverse impact that the entry of large foreign chains with deep pockets might have on the livelihoods of mom-and-pop store owners and small hawkers. The naysayers stand on a weaker wicket, though, when it comes to securing farmer/producer interests.

And that's where those wanting the Walmarts and Tescos to set up shop — literally — have a persuasive point that it will stimulate the creation of a modern backend infrastructure for sourcing of agri-produce.

The sheer requirement of feeding their nationwide network of stores would force these retail giants to invest in centralised warehouses, refrigerated trucks and, even further down, facilities to procure, clean, sort, grade, pre-cool and pack produce closer to the farms.

The same vested interest will also guide them to rationalise existing supply chains and cut out the layers of intermediaries between the farmgate and the final retail point. While middlemen may remain at the primary produce aggregation stage — just as the foreign retailers are unlikely to set up the entire backend by themselves — farmers would still gain from an overall compression of the post-harvest value chain.

Rahul and Beyond

The above view — also echoed recently by the Congress leader, Rahul Gandhi — has a certain merit that the critics of FDI tend to ignore. But it raises the question: Is there no other way of stimulating backend investments to enable farmers market their produce more efficiently and realise better prices? Do we really need Big Retail to meet these objectives, more so if its entry risks causing collateral damage to millions of small shopkeepers?

For an answer, one may first look at the Government's own minimum support price (MSP) programme. The ruling Congress-led alliance can take pride in having significantly raised the MSPs of most crops in its seven years, compared with the earlier period (Table 1). But how effective have these been on the ground?

The Commission for Agricultural Costs and Prices (CACP) conducted a field study of four mandis in Gujarat and five each of Uttar Pradesh (UP) and Bihar during the recent harvest of the 2010-11 wheat crop. It was found that about 80 per cent of the wheat brought to the Gujarat mandis was sold at Rs 950-1,050/quintal, as against the MSP of Rs 1,170. In UP, too, over 40 per cent of the farmers surveyed reported selling below the official floor price.

The reasons are not difficult to see. The Government announces MSPs year after year, but it has hardly any mechanism for implementation. The Food Corporation of India's (FCI) procurement operations are largely limited to the Green Revolution belt of North-West India, whereas its purchase centres in Bihar or UP have actually come down in recent years (Table 2).

Some States have done a great job of procuring through their own agencies and cooperative societies: Madhya Pradesh in wheat or Chhattisgarh and Odisha in paddy. But the civil supply corporations and marketing federations in other States lack even basic storage space or working capital to buy directly from farmers.

‘Procurement process outsourcing'

It raises two fundamental issues. The first is the very morality of announcing MSP and not ensuring farmers get it. How can the Government declare a floor price and just forget about it? The second concerns the Government's much-vaunted ambition of taking the Green Revolution to Eastern India, seen as the country's main granary in the years to come. How can this happen if farmers in Bihar or West Bengal do not have even an assured market for their produce?

This is where the CACP Chairman, Dr Ashok Gulati's views on evolving a public-private partnership (PPP) model in MSP operations are worth considering. The Government has already involved private players in warehousing of its grain stocks. The likes of Adani now operate silos and bulk handling facilities for FCI, which also has a scheme guaranteeing assured hiring of privately-built godowns for ten years.

When outsourcing in storage has been tried out, what stops its extension to public procurement as well? If the idea is to deliver MSP to farmers, and FCI has its limitations, why not entrust the job to an ITC, Reliance, Adani or even Cargill and Bunge, asks Dr. Gulati.

The Government could try this out first in those regions where its own agencies are not present. It may then invite bids from any party — from large corporates to cooperatives and smaller traders — to buy on its behalf from farmers in a particular area, subject to their adhering to strict and transparent rules of MSP enforcement. The institutions of Lokpal and Right to Information may be most useful here.

The above PPP model can open up a new business opportunity of MSP procurement on Government account for agri-corporates. More important, it would set off a virtuous process of incentivising the creation of a real backend infrastructure for marketing of produce, especially in crops and States where MSPs exist only in name.

Isn't that also the main defence offered in favour of FDI in retail? If so, it is probably a better and politically more palatable option.

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