Calcutta Notebook

An Alternative to MSP

Bharat Jhunjhunwala

The farmers and the government both want the farmer’s income to double in a short period of time. The farmers believe that maintenance of the Minimum Support Price (MSP) is the way forward. They would get assured high prices; they would increase production and obtain high incomes. However, the Governments feels that the MSP leads to excess production which becomes a burden on the economy as a whole and that, in turn, also leads to a reduction of income of all the people including the farmers. It must be noted though that the farmers approach assures them of high incomes the Government’s approach does not help improve the incomes of the farmers. Therefore, the farmers are justified in demanding legislative protection for MSP.

Let us understand the Government’s point of view. The MSP distorts the production pattern. The farmers produce more of wheat and paddy because they are assured of high prices. The increased production would lead to lowering increase supply in the market if there was no MSP. That would lead to lower prices and the farmers would reduce the production of these crops in the next year. In this manner the demand and supply of wheat and paddy would get balanced out. Prices would rise and the farmers would increase production if there was less production. Conversely, the prices would fall and the farmers would reduce production if there was more production. This self-correction mechanism does not work once MSP is in place. The farmers continue to increase production even when there are already excess stocks because they are lured by the high MSP. The increased production does not lead to lowering of prices because the MSP is fixed. The result is that this excess production has to be exported at a very low price. At the end of the day, the Government buys these crops at a higher price and exports them at a lower price leading to a financial burden and that burden dissolves on all the people including the farmers. Government is justified in removing the MSP because of this problem. However, the government has no solution as to how the income of the farmers will be increased then. But solutions are available.

The first solution is that the government should try to shift the farmers from low-value MSP-supported crops like wheat and paddy to high-value crops. Farmers produce pepper in Kerala, silk and areca in Karnataka, mango in Maharashtra, Bengal and Uttar Pradesh, palm in Andhra and pan leaves in Bihar and Bengal. Farmers producing these high-value crops generally do not agitate for MSP. They are already getting good income from these crops. The situation at the global level is even more dramatic. Tunisia produces olives, France produces grapes, Netherland produces tulip flowers, United States produces walnuts, Saudi Arabia produces dates. These countries sell these crops at a high price in the global market. The farm worker in Netherland earns about Rs. 10,000 per day in the production of tulip flowers. People should be able to pay farm workers a wage of Rs 10,000 per day if they can also produce tulip flowers.

The second solution is to increase the level of cash transfer already being done. There exist about three crore farmer families in the country. The government could transfer Rs. 1,00,000 per family per year and assure them of a basic minimum income. Having done this, the Government can dismantle the MSP and also scrap all the subsidies being given on fertilisers, electricity, water, food grains and exports. The price of wheat and paddy in the market would then reduce and the farmers would produce more mango and pan leaves. The farmers would have no reason to complain because their minimum incomes are assured by cash transfers. The Centre and State Governments would save about Rs 6,00,000 crore if they scrap MSP and all the subsidies. One half of this, or Rs 3,00,000 crore can be given to the farmers as direct cash transfer of Rs one lakh per family per year. Then the farmers would have no argument to agitate because their basic incomes would be assured.

The difficulty in implementing these solutions is that the research bureaucracy of Indian Council of Agricultural Research laboratories and Indian Universities is just not interested in undertaking any research. Their salaries are secure. They continue to get the salaries irrespective of whether they do any research or not. They make a good bio data by publishing cut-and-paste academic papers in fake journals. Therefore, the government should dismantle this entire research bureaucracy and give research contracts to these Government laboratories as well as private institutions to undertake mission-based research and produce specialised crops that can provide high income in every part of the country.

The second difficulty in implementing this solution is that the bureaucracies of the Food Corporation and the Public Distribution System thrive on the purchase, storing, transport and sale of food grains. They will get no income if the government dismantles the MSP. Therefore, they do not allow the politicians to implement these solutions.

A problem in this solution is that the production of specific crops can oscillate. There may be excess production of wheat and paddy in some years and there may be shortage in other years. The solution is that the Government should convert the Food Corporation of India into a “Food Trading Corporation.” This Corporation should make future contracts for supplies of various crops such that the price stability is maintained within reasonable band. This Corporation can also import and export as the situation may warrant. In this manner one can get a secured supply of food grains without having to pay huge wasteful subsidies on fertiliser, electricity, water, food grains and exports.

[Formerly Professor of Economics at IIM Bengaluru

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Vol 54, No. 25, Dec 19 - 25, 2021