Costs of MSP-FCI system now prohibitive & even Madhya Pradesh, a big beneficiary, is trying better alternatives
Given the distress in rural India, exacerbated by demonetisation, it is not surprising the government has announced a slightly bigger hike in the Minimum Support Price (MSP) for wheat, of 6.8% compared with a 6.6% increase in FY17. While it is the drop in prices of horticulture—now bigger than agriculture—that is more the cause of the distress, the government is not taking chances since the rabi crop is as important as the kharif one. There are chances the kharif output will come in at levels that are lower than anticipated following the excess rainfall in some regions and a shortfall in others. In aggregate, the weighted average increase for winter crops of an estimated 7.4% is slightly lower than the hike of 8.5% for FY17. While the government has implemented modest hikes—just 4% between FY14 and FY16—this year, the combined hike is slightly higher, at 6.6% compared with 6.4% in FY17.
The MSP, of course, has its uses—as is well known, more than half of the big jump in the country’s wheat production in the five years to 2013 was due to extra output in Madhya Pradesh (MP), and that was driven by MSPs and bonuses provided by the state. Farmers, across MP, devoted more acreage to wheat, reinvesting the increased earnings in improving productivity. Yet, the same impact is not evident elsewhere. Despite the 12% hike in the MSP of five pulses in 2016-17, the 40% rise in output, primarily, ensured prices were not just below the MSP in most mandis, they fell 8% and profit margins contracted 16%—if you remove gram, the fall in profits was as much as 30%. The government did procure a record 1.6 million tonnes of pulses, but this was too small to make a difference—farmers moved away from the crop and sowing fell by close to 4% this year.
A mere 5-6% of farmers benefit from MSPs and, equally important, the costs of the system are getting oppressive. MSPs make no sense unless there is significant procurement, but with FCI so inefficient, that drives up costs significantly. In the past, there was no other option to MSPs and FCI to deliver rations; now, with Aadhaar, the government can move to targeted cash payments. Even if, under the Food Security Act, two-thirds of Indians are to be subsidised—difference between ration and market price is around Rs 22 per kg—disbanding the MSP-FCI network and using Aadhaar-based bank transfers would save Rs 38,000 crore every year. In which case, farmers could also be given cash transfers per acre of holdings and this, in turn, would make them more attuned to the market. Greater market access for farmers—not just locally but also to markets overseas—is also a better way to ensure they get a higher price for their produce. Easing rules to ensure organised retailers can purchase from the farm-gate will give farmers better realisations, and FDI in multi-brand retail is critical here. Extending the futures and options market to agricultural crops too would facilitate better price discovery. Even MP, a big beneficiary of MSPs, keep in mind, is looking at new alternatives—cash transfers to farmers who sell their produce in the market at below MSP levels. MSPs are passé, yet the government is unwilling to move on.