MSP as legal security is a proposition made for disaster, which will lead to market collapse
Farmer groups are all set to converge to decide how to move forward with their claim for MSP as legal collateral. Some farmers want a legal guaranteed minimum support price (MSP) for all crops. They don’t want the government to buy all the crops but just pay the difference between the market price and the MSP to the farmers. This is a bid made for disaster and will lead to the collapse of Indian agricultural commodity markets.
A few scenarios should be considered to understand the impact of the MSP legal warranty on all crops. Farmer groups are not saying they want the government to source from MSP, but to pay the difference whenever the market price falls below MSP. This is similar to the Bhavantar program launched by the Madhya Pradesh government in 2017. The program ran for three seasons, for nearly 18 months, and then stopped.
The lesson of this program is that paying the price difference to farmers is not a solution. To illustrate, the MSP for soybeans, one of Madhya Pradesh’s major crops, was advertised under the Bhavantar Bhugtan Yojana at Rs 3200/quintal, Rs 300-400 higher than the average wholesale price farmers were getting. previously. The farmer lot was very happy. But when the farmers went to the mandis with the harvest, the price had crashed to Rs 1800-2000 from Rs 2800-2900. Such a massive drop in prices with no change in demand and supply meant that traders colluded to suppress prices and producers’ margins were wiped out in one fell swoop.
The arhatiyas had convinced the farmers that the government would give the difference and therefore they should accept whatever was offered. However, not all farmers could enroll in the program to benefit from it. The arhatiyas registered as farmers and pocketed the difference in their accounts. For some products, the profit received by traders was 20 to 25 times higher than the cost of production in the state. This happened through the manipulation of registration, as there was no procurement or physical transfer of produce from the farmer to the government. Registration has become the means for traders to play the system with huge profit.
The manipulation and hijacking of the scheme was so huge that the government had to cancel the whole scheme within 18 months. Even farmers’ associations have called for its cancellation.
The outcome of the imperfect MP experiment, as demanded by a vocal section of farmers, if repeated across the country, will in all probability lead to a massive drop in the prices of several commodities across the country. . It is a terrifying prospect for any agricultural producer, government or economy.
Fake price, artificial scarcity
Since the MP Bhavantar scheme led to the collapse of the market, it was suggested to cap the differential so that it does not cause prices to fall. Yet even if the spread is capped at, say, 10% or 20%, that spread will set the new market price because traders will pay the farmer nothing more than that. Thus, whatever the differential, it will be adjusted in the new market price. Indeed, the market price is artificially depressed and the agricultural producer is left to the whims of the government apparatus to calculate and provide the differential. Production is not based on demand but on an artificial price and government largesse. Worse still, traders will again monopolize the “guaranteed” gains in all likelihood.
Market collapse means that price is no longer determined by supply and demand. Therefore, production will not follow market needs or demands. Farmers will grow not what they need, but which crop gets the highest MSP.
Therefore, farmers’ interest will be decoupled from demand and linked to protest and pressure for higher MSP each year. This is what a collapsing market does: it distorts not only a market structure but also a social and political structure. If the demand exceeds the supply due to the artificial triggering of a false price, the real price will crash and the buyers might also disappear from the market.
If the buyers disappear, the growers will not produce it next season either, thinking that their product will not earn a rate of return and the crop produced will have to be burned or destroyed. The resulting artificial scarcity will drive imports to meet real local demand.
This is not a scenario or a hypothetical cycle; this has happened many times in the past for several commodities. Unnecessary government intervention on prices also means that when imports are made to prevent inflation and public outrage, politicians would be forced to subsidize the imported price to traders. More rounds of subsidies and government interventions would benefit not producers but traders or importers, which in turn would benefit subsidized producers or farmers in other countries who will supply us with these products. Malaysian, Australian or Canadian farmers would grow produce for India as the Indian market is huge, but Indian farmers have stopped growing such produce. This has happened with pulses and continues to be observed for oilseeds.
When the minimum price is the maximum price
Of course, with the MSP as a legal guarantee for all crops, the minimum support price will effectively become the maximum price farmers can obtain in the market. The trader or arhatiya caucus of mandis will ensure that the price never exceeds the MSP. This in itself will serve the interests of the producers badly as their margins will be limited by what the government sets as MSP.
Farmers will not switch to crops other than wheat and rice because the yield of these crops is the highest. Farmers choose the crop based on maximum yield or earnings per acre, not just price per kg. If dal and maize have low yields, even with guaranteed MSP, a farmer will not change until they give higher yields than wheat and rice. Wheat and rice are easy options as the yield is the highest due to huge investments in seeds and fertilizers. Government research laboratories have also concentrated all their efforts and energy on improving the different varieties of wheat and rice.
According to available data, on average, the productivity of paddy and wheat is recorded at about 27-28 quintals/acre and 20-21 quintals/acre, respectively, in Punjab. These are average yields and the range may be higher depending on soil quality, water availability and quality of seed used.
With such yields, a rice farmer can sell paddy worth Rs 51,000-Rs 53,000 per acre compared to Rs 36,315-Rs 37,660 per acre seven years ago. There is an increase from Rs 15,000 to Rs 16,000 per acre. Similarly, wheat farmers can now sell wheat at Rs 39,500-Rs 41,475 per acre compared to Rs 27,000-Rs 28,350 per acre seven years ago.
If wheat and rice kalchakra is not broken, the groundwater situation will deteriorate further and the land will become unsuitable for agriculture.
Groundwater development (ratio of gross draft for all uses to net groundwater availability) in Punjab and Haryana is 166% (the highest in the country) and 137%, respectively, which which is well above the national average of 63.3%. Of the 138 blocks in Punjab assessed for groundwater, 109 blocks were classified as “overexploited”, two as “critical”, five as “semi-critical” and 22 as “safe” with no salt block in the state. In Haryana, of the 128 blocks assessed for groundwater, 78 were classified as “overexploited”, three as “critical”, 21 as “semi-critical” and 26 as “safe” (Central Ground Water Board, 2019 ).
Interfering with market forces and building artificial pricing models is neither economically nor environmentally sound. Farmers must avoid being misled by leaders who do not have their long-term interests in mind.
The author is CEO of the Center for Public Policy Innovation. The opinions expressed in this article are those of the author and do not represent the position of this publication.
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