One of the more aggressive steps taken by the government to enhance the income levels of farmers was to announce higher MSPs for the kharif and rabi crops this season. But a question often posed is as to how effective are these announcements in terms of delivering the price to the farmer? For the MSP to work, there have to be buyers at this announced price or else the farmer will never be able to sell the crop. This issue becomes acute when there are oversupply conditions in the market and prices tend to go down.
While this was accepted in the past, today it has become controversial since lower incomes of farmers has had negative effects of debt servicing, suicides and loan waivers. Also the ‘rural demand’ story has been dented sharply even when the harvest is good on account of lower remuneration. Therefore, the MSP has been projected as being a panacea. The challenge is how does one get the buyer in the market to buy at a price which is higher than what the demand-supply conditions warrant? Presently there is an active procurement scheme in case of rice and wheat.
This means that with the MSPs being announced, farmers can walk up to any procurement centre identified by the government and sell the crop at this price. But it has been seen that even for rice and wheat, the machinery exists for a handful of states which include UP, Punjab, Haryana, Odisha, AP, Telangana, TN, WB, and Uttarakhand. This means that a farmer producing rice, in say Maharashtra, may not have easy access to the FCI agency. Farmers, then, perforce have to sell to the private parties which will be driven by the market forces.
It is only when the private buyer sees that the farmer has alternatives that the willingness to pay a higher price increases. Therefore, for MSP to work, procurement is essential. Interestingly today, if one were to look at the highest price in any market for Tur in Maharashtra for October, it is around Rs 3300-3400/qtl as against a MSP of Rs 5,675/qtl (AGMARKNET). In case of moong and urad, with MSP of Rs 6,925/qtl and 5,600/qtl respectively, the modal value is lower at Rs 4600-5100/qtl and Rs 4000-4400/quintal respectively. Even for soybean while the MSP is around Rs 3,399 the average modal price across markets during the month was at Rs 2900-3100/qtl.
The government does not have the machinery to buy these stocks and even in case it does, warehousing and disposal is a challenge. This involves a carrying cost and would become difficult to dispose of as it is not part of the PDS system. In fact, with Aadhaar coming in for implementing PDS, procurement becomes a contradiction. Logically, if households are being given a cash equivalent for buying foodgrains, then there is no need for having ration shops. And in this scenario of getting the MSP to be effective, procurement is necessary! Now disposing off pulses in the market becomes relevant only in case the crop falls short in the immediate subsequent year.
If the crop is good this time, then it would be a challenge to sell old stock. In fact any sale undertaken by the government will only depress prices further. At the same time unlike say sugar where there can be a policy for exporting surpluses, it is not possible for pulses as there are no large consuming countries in the world which rely on imports. An idea here is to compensate farmers for the difference between the price received in the market and MSP without there being procurement. This scheme called the Price Deficiency Payment has being proposed for soybean with a limit of 25% being set for this season. This makes sense though implementation will always pose challenges.
This is a very interesting proposition and could be linked directly with Aadhaar to ensure that the beneficiary is well identified. Further, the mandis that are to be covered should be known to all so that the price collection systems can be monitored in these selected markets. There will however be the challenge of identifying the actual price received by the farmer as there would be a ‘tendency to cheat’ wherein the farmer says that a lower price has been received. Alternatively the buyer may pay even lower rates knowing fully well that the government is providing the compensation.
As both parties may game the system, to prevent such adverse selection the mandis chosen for this purpose must be well regulated and transparent in operations. A way out would be to link all such compensations with the eNAM where there is a transparent system and as this concept catches up and all transactions are captured on this platform, providing this compensation will become a smoother and more effective operation. Otherwise, choosing a fair price in the market will be difficult given that the mandis are very opaque in operations.
Madan Sabnavis is a Chief Economist, CARE ratings. The views are personal.