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Why an MSP law would be absolutely ridiculous

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The farmer delegations meeting with the government of India representatives, led by the agriculture minister Shri Narendra Tomar, have arrived at consensus on two of their four demands: the decriminalization of stubble burning and continuation of electricity subsidies. However, the two major demands of the farmers: repeal of the farm laws, and a new law guaranteeing MSP to farmers, are still on the table. In this article, we will discuss why the second of these demands: a law guaranteeing MSP to farmers, is absolutely untenable.

MSP is a price guarantee offered by the GoI to farmers at or before sowing time that removes the risk due to price volatility of crops. It is only offered on 24 crops, and most of the GoI’s MSP procurement happens for the two grains of wheat and paddy. Punjab grows these two grains almost exclusively, and sells almost 90% of its production of these grains to the GoI at MSP. Other states are very different in both ways: no other state (with exception of Haryana) grows only these crops almost exclusively, and no other state sells almost all of its production of these grains to the GoI at MSP. MSP varies from season to season, but is typically considerably more than open market mandi prices by 20-40%.

Because of the factors that make Punjab very different, what Punjab has is an extremely cosy arrangement where it has no risk AND gets a higher-than-market price for nearly all its agro production. Simply put, Punjab’s agriculture has one customer—the GoI—that buys nearly all its production at higher-than-market price. Who wouldn’t want such a charmed existence. Punjab’s farmers and its APMC-mandi Arhatiyas realize this more than anyone else, which is why they are trying hard to continue this cosy arrangement. Hence the “kisan protests” in Delhi and the various acts of vandalism in Punjab. It is basically a subsidized crowd that wants to hold on to its subsidy.

What the farmers now want is a new law: a law that would guarantee MSP prices for their produce. This would go one step further than the current situation. At the moment, even though Punjab enjoys all of this monetary benefit from the GoI, there is no law saying that the GoI MUST buy Punjab’s produce at MSP. Why does the GoI do it, then? It is partly for legacy reasons: this arrangement debuted during the 60’s and the food shortages, and partly for political reasons: no one wants to ruffle the feathers of the huge Punjabi vote bank that enjoys these subsidies.

But taking it to the next level would be absolutely untenable. Why? Because let us suppose such a law were to be passed. Then, it would not really change anything for Punjab: after all, they already sell all their produce at MSP to the GoI. But once such a law is passed, every farmer in India would be entitled to do the same. Let us take one state: UP, which produces the most wheat in India. UP produces 18% of India’s wheat (to Punjab’s 12%). But it sells only 10% of its wheat to the GoI at MSP. In other words, UP does not avail of this huge central government subsidy and risk-reduction. It’s own farmers bear the risks of crop production, and typically they sell their wheat at local mandis at roughly 30% lower price than MSP. If an MSP law were passed, just in UP alone, the GoI would now be liable to pick up almost 10 times the wheat it does, at high price. Now imagine the effect for both the grain crops: wheat and rice, all across India. Take the case of W. Bengal, which is the largest paddy producer in India. If an MSP law were passed, GoI would be obliged to buy ALL of its production of paddy at top cost, compared to the near ZERO it does today.

But isn’t that fair? In other words, the argument against an MSP law seems to be that “if we pass such a law, every farmer would get the sweet deal that today only Punjab farmers get.” In a sense, yet. But more realistically speaking, MSP itself has to be restructured. Punjab’s special privileges must go. If the GoI procures grains at MSP, let it do so on a state-by-state quota system so that UP, Bengal, and Punjab each contribute to the FCI’s procurement, in proportion to their population, their production, and their percent of people that live below poverty and avail of the public distribution system. That is the only realistic way in which fairness in procurement can be reached. A MSP law for all of India would be a financial disaster that no government could tolerate. Already, the FCI, to placate the Punjab farmer, buys far more grain than the demand of that grain. At the moment, FCI surplus stocks are at 2-3 years of demand. Going by market forces, the FCI should NOT be procuring more grain, yet it does. Why? For political reasons, so that Punjab farmers “don’t get upset.” This state of permanent appeasement of a single state is not tenable. It is certainly not repeatable for all states across India. Already the FCI has huge financial burdens: to replicate them all over India would be ruinous.

It is time to be honest with ourselves: how much longer can the GoI act as the single client for Punjab’s entire farm production? What wrong have states like Bihar, UP, W. Bengal, MP, and other grain producers done that the GoI procures very little from them, and everything from Punjab? Isn’t it time to restructure FCI procurement and make it more fair across the spectrum of Indian states? I think so. What do you think?

Acknowledgement: The graphic showing Punjab’s highly advantageous position with regards to MSP as a proportion of production is from the Financial Express.

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