Cost estimates of legalising MSP purely theoretical attempts: Ramesh Chand

States and Centre should jointly work towards ensuring MSP; farm law repeal temporary setback to growth and development of agriculture

After the repeal of the three farm acts, one key demand of the protesting farmers is legalising the Minimum Support Price (MSP) mechanism. In an interview with Business Standard, NITI Aayog member and eminent agriculture economist Ramesh Chand discusses the pros and cons of the demand and how realistic are the numbers being cited for the likely cost to exchequer of giving legal guarantee to MSP. Edited excerpts:

There are a lot of numbers floating around on the cost to exchequer if MSP is legalised and the government ends up buying a portion of the produce annually. What is your estimate of the likely financial implication of such a measure?

The government is enlarging effective coverage of MSP to more crops and producers by expanding public procurement. Like for cereals, a buffer stock of pulses has also been created to support procurement of pulses. Public agencies are also procuring some oilseeds. Further, states have been given the option under PMASHA to procure 25% of produce for which financial support is provided by the Centre. The estimates of cost to exchequer of legalising MSP are theoretical attempts.

But, broadly it is assumed that in a given year whatever is the value of farm goods purchased by the government, 40 per cent is the cost incurred by it to make those purchases. And, unless the level of purchase is known, it is very difficult to estimate the actual cost to the exchequer. Moreover, it has to be understood that the government is committed to providing MSP to more and more farmers using procurement and PMASHA.

Besides fiscal factors, legalising MSP has serious implications for market clearance, private sector participation in agriculture trade and import and export competitiveness. Experience with sugarcane and soybean in Maharashtra shows that legalising MSP does not work and it can lead to total chaos in the market, which is detrimental to the interest of producers as well as consumers.

If you zero in on a broad estimate what are the parameters which have you taken into account while coming at the number and assumptions that you have considered?

Theoretically, the estimate of the financial implication of legalising MSP will depend upon the level of MSP that is legalised, the open market price, method of paying for legalised MSP like procurement or price insurance or price deficiency payment. Legalising MSP has some justification to fill the gap between what would be the price based on demand and supply factors and market price received by farmers. If there are market imperfections, poor competitiveness or collusion among traders because of which producers receive lower price as compared to fair market price then there is justification to take relevant measures so that producers are not denied fair market price. This is what is meant by MSP. The MSP which ignores demand and supply factors and is fixed based on a norm, like at least 50% margin over cost, becomes an income support measure for producers. Seeking a guarantee to legalise cost+ price as MSP, and the MSP that represents fair market price are two different things with different implications.

Some people are saying legalising MSP does not mean fixing a floor rate for private traders to buy at that pre-fixed rate. But, it would mean that there will be some sort of a government guarantee of intervention as and when prices fall below MSP. Why and how do you think this assumption is flawed? If at all it is?

The goal underlying MSP is to ensure that farmers are not deprived of remunerative and fair prices. This can be ensured in two ways. One by government intervention and secondly by creating a competitive market environment. Government needs to intervene if competitive market forces fail to deliver fair and remunerative prices. The three farm laws which are being repealed now were meant to create a competitive environment for farm produce to meet the goal of fair and remunerative price on a sustainable basis and provide a durable solution to un-remunerative farm prices. Still, there could be situations like glut or volatility in international prices which turn out to be adverse for farmers. Government is then required to intervene and compensate farmers for lower prices. Various mechanisms are available for this. Intervening too much in prices is counter-productive and not in the interest of any sector in the long run.

There is also a suggestion in some quarters to legalise the PM ASHAA scheme. Do you think it is doable? What are the pitfalls or positives of such a move?

Under PM ASHA, states are given three options to intervene in marketing of those MSP crops where central government intervention is small or absent. States should voluntarily adopt PM ASHA and help the farmers get remunerative prices. Ensuring MSP for as many as 23 crops, some of which are grown only in small pockets, should not be left to the Centre alone. It should be a shared responsibility of Centre and States.

Finally, other than legalising MSP, what could be the possible options for the government to ensure some sort of assured pricing for farmers?

The government has tried to implement long debated measures to liberalise agricultural markets for better competition and price realisation through new farm laws. In the aftermath of repeal of these farm laws, the prime minister has announced that a committee consisting of experts and stakeholders will be set up to look into various aspects of agriculture including issues relating to marketing and prices of farm produce. The new roadmap and possible options will be clear after this.The new roadmap will emerge after this. In the meantime states should be persuaded to undertake market reforms as agreed by them from time to time.

You have been advocating a price deficiency scheme as an alternative to guaranteed MSP. How will that work? Previous experience in some states such as MP has not been particularly successful as I understand. What have been the flaws and learnings that policy makers can imbibe from those?

Price deficiency payment option is already there in the PM ASHA scheme. It requires the active role of states rather than looking at entire intervention by the central government. According to my analysis, price deficiency payment worked well in MP but it was not understood properly. There are possibilities of simplifying and improving this scheme further. The US, China and EU are using a similar intervention to support farmers without distorting market price. In our diverse and vast country, it is desirable to use different options rather than relying solely on procurement options for ensuring MSP to producers.

Finally, do you think the repeal of farm acts is a setback for the agriculture sector broadly. And, should things have been handled differently. How and what should now be the way forward from here so that sector and the trajectory of reforms does not suffer?

Yes, I am of the opinion that it is a setback to growth and development of agriculture but the setback is temporary. In a democratic system like ours, we learn from our success as well as obstacles to success. What needs to be applauded is that the present government implemented what was being debated for more than two decades. I am quite hopeful that all stakeholders will reflect upon their decisions and come out with a way forward which is essential for the economic transformation of our farmers and farming in the current environment.