MSP vs Markets: A question of efficiency

The Indian democracy was at full play over the passage of the new farm laws. While the government hailed it as historic decision, and I tend to agree with that, opposition parties branded it as a ‘dark day for farmers’, a ‘sellout to corporate sharks’, etc. What amused me most was how come everyone’s heart was suddenly bleeding with their love for farmers!

Discerning the real arguments behind this cacophony of political voices, I could see that both sides of the political spectrum want farmers’ incomes to improve. The opposition wanted to make it through higher and more effective MSP (minimum support prices), while the government was offering greater choice through markets, without demolishing the existing system of MSP.

Having analysed the MSP business over decades, let me say clearly that MSP was the creation of scarcity era of mid 1960s. But, Indian agriculture has turned the corner from scarcity to surplus. The policy instruments of dealing with shortages are different than dealing with surpluses. In a surplus economy, unless we allow greater role of markets and be demand-driven, the MSP route can spell financial disaster. This transition is not a ‘zero-one’ game, it is only changing the mix of how much of pricing should be state-supported and how much market-driven.

These farm laws are trying to increase the relative role of markets without dismantling the MSP system. Let me also say that currently, no system is perfect, be it MSP or market-led. But the MSP system is much more costly and inefficient, while the market-led system will be more sustainable, provided we can ‘get the markets right’. Let me explain that in some detail.

MSP is implemented primarily in paddy and wheat in selected states, and in recent years, some amounts of pulses, oilseeds, and cotton are also bought by the government occasionally. Look at the results of MSP-dominated system of rice and wheat. The stocks with the government are bulging way above the buffer stock norms (see graphic). The economic cost of procured rice comes to about Rs 37/kg and wheat at around Rs 27/kg. The CTC (cost to company) of departmental labour of the Food Corporation of India (FCI) is 6-8 times higher than contract labour in the market. No wonder, market prices of rice and wheat are much lower than the economic cost of FCI. In Bihar’s rural areas, for instance, you can easily get rice in retail market at Rs 23-25/kg. The bottomline is that grain stocks with the FCI can’t be exported without a subsidy, which invites WTO objections.

The real bill of food subsidy is going through the roof, but is not reflected in the central budget as the FCI is asked to borrow more and more. The debt burden of the FCI is crossing Rs 3 lakh crore. We are simply postponing a financial crisis in food management system. The FCI can reduce costs if it uses policy instruments like ‘put options’. But who cares for cost efficiency when operations are in the name of poor!

Some scholars have even compared sugarcane-pricing and milk-pricing by co-operatives as MSP. Technically, that is not correct. MSP is an assurance (not legally binding) by the government to the farmers that it will buy at MSP if market prices go below MSP. In case of sugarcane, the government announces ‘Fair and Remunerative Price (FRP)’ to be paid by sugar factories, and Uttar Pradesh announces its own ‘State Advised Price (SAP)’. And, look at the mess we have created in the sugar sector. We have cane arrears of more than Rs 8,000 crore, with large surpluses of sugar that can’t be exported, making this sector globally non-competitive by sheer populism of SAP! Unless pricing of sugarcane follows the Rangaranjan Committee’s recommendations, which is somewhat akin to milk pricing, these problems of sugar sector will not go away.

That brings me to the most important commodity of Indian agriculture, namely milk, whose value is more than the value of rice, wheat, and sugarcane combined. In case of milk co-operatives, pricing is done by the company in consultation with milk federations, not by the government. It is more in the nature of a contract price. RS Sodhi, the MD of the largest milk cooperative (GCMMF, AMUL), says that milk does not have MSP. It competes with private companies, be it Nestle or Hatsun or Schreiber Dynamix dairies.

And, the milk sector has been growing over years at a rate that is 2-3 times higher than the growth in rice, wheat and sugarcane. Today, India is the largest producer of milk (187 million tonnes), ahead of the US which ranks second with a milk production of around 100 million tonnes.

My reading as a policy analyst is that in the next 3-5 years, hundreds and thousands of companies will be encouraged to build efficient supply lines somewhat on the lines of milk, as a result of these changes in farm laws. It will be for different agri-commodities, in states where they find the investment climate right, be it with farmers producer organisations (FPOs) or through aggregators. Some will fail, but many will succeed. These companies will help raise productivity, quality, safety of the produce, as it happened in the poultry sector.

Milk and poultry don’t have MSP and don’t go through a mandi system, paying high commissions, market fees and cess.

The choice is ours: Do we want sustainable growth that is also financially sustainable, or create a mess that we already have in rice, wheat, and sugar which are MSP- and SAP-dominated?

At the end, I must say that crop price has its own limits in raising farmers’ incomes. More sustainable solutions lie in augmenting productivity, diversifying to high value crops, and shifting people out of agriculture to high productivity jobs elsewhere. But, no one talked about these during these agitations!

 Infosys chair professor for agriculture, Icrier