Assessing the case for a legal MSP

Greater clarity on its precise connotation could help resolve the continuing standoff between the government and farmers

The year-long standoff between the government and the farmers ended with the government’s decision to repeal the three farm laws. However, there is now a new bone of contention: the demand for a legally guaranteed Minimum Support Price (MSP) for all 23 crops for which an MSP is announced annually by the government. In order to assess the merits of this demand, we must first try to understand the thinking behind it.

What is not widely recognised is that due to characteristics unique to farming, market failure is rampant in agriculture. Which means that unregulated free markets throw up outcomes that are detrimental to both farmers and consumers. The seasonality of farm production means that the vast majority of farmers (who lack the resources to store their crop) come to the market at the same time. During a bumper harvest, while prices fall, the resulting rise in demand is not enough to salvage incomes, especially for those producing food crops. Being basic necessities of life, the demand for food crops is typically price inelastic, which means consumers will not demand very much more, even when prices fall. And unlike industrial producers who can make profits even as prices fall, by cutting unit costs, in agriculture, uncertainties of the weather and limitations of soil fertility and water availability, imply that increasing returns to scale are very difficult to achieve for most farmers.  Thus, in bumper harvests, farm revenues necessarily decline for the vast majority of India’s small and marginal farmers. For these farmers, the best of times is also the worst of times! Correspondingly, for poor consumers, unregulated markets for foodgrains mean that during a drought they either starve or get pauperised, being forced to buy very expensive commodities, conveniently hoarded up by traders.

This is precisely the reason why, to protect both farmers and consumers, the state has intervened in agricultural markets for at least 50 years now. The Food Corporation of India and the Agricultural Prices Commission were both set up in 1965. The idea was that as farm output rises with the Green Revolution (GR), farmers must be assured that their surplus would be bought by the government at an MSP that is high enough to leave them a margin, after covering their costs. The crops procured were then made available to consumers at subsidised rates through the Public Distribution System (PDS). Thus, government intervention protected farmers during bumper crops and dipped into the buffer stock so developed, to protect consumers during droughts. This is how India got its much-vaunted food security over the past several decades.

The problem, however, is that the MSP regime has been narrowly focused on rice and wheat and has worked in only a few regions of the country, covering a very small proportion of farmers. This is the impulse behind the demand for a legally guaranteed MSP. It is argued that only a legal guarantee will ensure that the government walks its talk by actually procuring the crops for which it announces MSPs. In the absence of which, the announcement of MSPs for 23 crops every year is reduced to a token ritual, with little benefit to most farmers. How many tribal areas and farmers, for example, are covered under the MSP regime?

There is also a powerful ecological and nutritional case for the demand. Ever since the Green Revolution, India has moved towards a monocultural regime driven by the narrow focus of public procurement on rice and wheat, with more and more land under one crop at a time, and year-on-year production of the same crop on the same land, which has greatly impaired resilience of farm systems in multiple ways. Around 90 per cent of India’s water is consumed in farming and of this 80 per cent is used up by rice, wheat and sugarcane. Farmers continue to grow these water-intensive crops even in water-short regions primarily because of an assured market – for rice and wheat in the form of public procurement. This only aggravates the water crisis.

In a recent paper in the Economic and Political Weekly (“Water and Agricultural Transformation in India”, July 17, 2021), we have made detailed calculations for 11 major states, which show how huge volumes of water could be saved if cropping patterns are diversified to include a variety of millets (rightly called ‘nutri-cereals’ now), pulses and oilseeds, which are better suited to the agro-ecology of each region. To incentivise farmers to make this change, governments must include them in procurement operations. The locally procured crops should then be incorporated into anganwadi supplementary nutrition and school mid-day meal programs. This would mean a large and steady market for farmers, while also making a huge contribution to tackling India’s twin syndemic of malnutrition and diabetes, since these crops have a much lower glycemic index, while providing higher content of dietary fibre, vitamins, minerals, protein and antioxidants.

The case for expanding and diversifying MSP-based public procurement is, therefore, well-established. The only question is: what is the best route for achieving this goal? This requires understanding what exactly we mean by a legal MSP. Clearly if this were to imply nationalisation of farm trade, where the government buys all farm produce, it would be an unmitigated disaster. Not even communist countries have attempted that. A punitive regime would be very hard to implement and end up becoming counter-productive, with the possibility that farmers may find no buyers, if traders refuse to buy at the legal MSP.

Maybe a closer look at the architecture of the Mahatma Gandhi National Rural Employment Act (MGNREGA) could provide some answers. Here was a government intervention in the labour market, which, left to its own devices, was resulting in terrible exploitation of the rural poor. But the MGNREGA does not mean that the government guarantees 365 days of work to every person who seeks work. The legal guarantee is for 100 days per family per year, around one-tenth of the former. But even such a small intervention has resulted in tightening of the labour market, with rural wages and livelihood security improving, wherever MGNREGA has been implemented well. It is this kind of intervention, in an agro-ecologically appropriate manner, that is needed in the markets for 23 commodities for which the government announces MSPs. So, if we are to speak of a legal MSP, the key is to back this guarantee through a programme with requisite resources (like under MGNREGA) and the specification of a time-frame within which central and state governments would progressively expand and diversify their procurement portfolios in line with regional agro-ecology.

It is fortunate that the Government of India has already proposed something very similar through its 2018 PM-AASHA scheme, wherein 25 per cent of actual production of the crop for that particular season would be procured by government (to be expanded up to 40 per cent, if the commodity is part of the PDS). Some state governments, like Odisha, have also introduced decentralised procurement of agro-ecologically more suitable crops. The “deficit price payment” mechanism can also play a crucial role, where the government pays the farmer the gap between market prices and MSP. Once government procurement reaches a critical mass, farmers will truly have a choice of buyer and are likely to get a remunerative price for their produce. But for that PM-AASHA needs to be seriously implemented, which it has not been so far.

Of course, both farmers and the government would do well to recognise that merely reforming the MSP regime is not going to resolve the farm crisis. In a forthcoming paper in the journal Ecology, Economy and Society, I have outlined 11 inter-related barriers in India’s policy framework that need to be dismantled, without which sustainable prosperity will remain a distant dream for India’s farmers. These reforms include correcting the uneven regional distribution of investments, which has led to the terrible neglect of India’s drylands; moving away from the commodity-centric R&D focused on a few favoured crops towards a whole systems understanding of farming; altering the pattern of subsidies that is overwhelmingly biased in favour of chemical inputs; taking the understanding of soils way beyond narrow GR thinking; strengthening the legal and regulatory framework governing chemical inputs; reviving public farm extension on a completely new footing; making massive investments in post-harvest infrastructure to support safe and nutritious food; reforming the outmoded architecture of water governance; and transforming agriculture education to bring it out of the 50-year-old outmoded GR paradigm. It is my sincere hope that both the government and farmers, drawing the right lessons from the long experience of the Green Revolution, will work together to move India towards this new paradigm of agro-ecological farming.

The writer is co-founder Samaj Pragati Sahayog, one of India’s largest grass-roots initiatives for water and livelihood security, and Chair, National Coalition for Natural Farming