Despite GoI announcing
the repeal of the three contentious farm laws, farmers' unions have decided to
continue their agitation until their six remaining demands that include legally
guaranteeing minimum support prices (MSP) are met. MSP is a weapon in the armoury
of economists, government, politicians and farmers. It is a useful tool -
depending on which side one is placed.
Twice a year, the agriculture ministry announces
MSP for all kharif (autumn) and rabi (spring) crops. The reasoning here is that
MSP is offered to farmers if they want to sell to the government at the time of
harvest and that, in a way, it allows farmers to plan their cropping pattern.
The Commission for Agricultural Costs and Prices
(CACP) calculates this price based on the cost of cultivation and adds a
markup. In corporate finance terms, the MSP is an option provided to the farmer
where he has a right but no obligation to sell to GoI at the time of harvest.
Also, the markup is something akin to the return on capital for the farmer. So
far so good.
Now, GoI announces these prices and, in the last
few years, has emphasised on the return on capital (RoC). Hence, even if the
MSP increases by, say, 4%, it will be said that the return over cost is 50% or
70%. This has good announcement effects as it shows that GoI 'cares'. However,
when MSP is increased by, say, 10%, then the cost factor goes to the background
and the absolute price is focused on. Hence, this is good advertisement.
The curious case of MSP is that while it is
announced for all crops - and gets all people on both sides involved in frantic
arguments on the price increase being inadequate (if low) or inflationary (if
high) - for all practical purposes, MSP is effective for rice and wheat alone.
Hence, while the MSP of maize can be increased, GoI is not there to buy the
crop. Or, for that matter, tur or urad.
The reason is that when the MSP was formulated, it
was tied to the elaborate Public Distribution System (PDS), which was
distribution of subsidised food grains to the needy. So, some 5,00,000 fair
price shops (FPSs), or ration shops, were created. The idea was that the Food
Corporation of India (FCI), with a staff count of 20,000-odd people, would
procure food grains and then store a part according to buffer stock norms and
distribute the rest through ration shops.
But the procurement is an open-ended scheme, hence,
there are excess stocks held in warehouses. Presently, there are stocks of 65
million tonnes held against buffer stock norms of around 31 million tonnes. So,
MSPs for other crops are quite irrelevant as there are no collection systems.
Those from the establishment will project MSP
increase from the point of view of the farmers, and will dwell on how their
income will increase, and as the nation works for farmers, this is the right
way ahead. Those in the opposition will argue these increases to be inadequate,
and that even the RoC has not kept pace with inflation. The past few years can
be used to buttress this argument. For economists, a sharp increase in MSP will
be interpreted as being inflationary. Even where procurement d ..
The protesting farmers assembled at Delhi borders
have voiced concern on GoI withdrawing MSP once private sale of food grains is
permitted. But this cannot happen as long as we have buffer stock, PDS and FCI,
not to mention CACP.
The challenge for GoI is manifold here. There is
already a commitment to direct benefit transfer (DBT). This means that at some
point, the PDS must be abandoned, as enough studies have shown that leakages
are high. Abandoning PDS will make 5,00,000-odd ration shops redundant.
Further, the giant FCI will have to be reduced to a dwarf, as maintaining a
buffer stock will be its only function. As in the last 20 years, India has
never really dipped into buffers stocks. They were relevant in the
1960s ..
But keeping all this in mind, dismantling MSP is
hard, considering the market cannot resolve all these (political) conundrums
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