MSP model's utility is long gone; new farm laws will give farmers more market access, promote agri exports

If administered prices have been seen to be ineffective in so many areas of economic activity, why should Indian agriculture be any different?

Aashish Chandorkar December 14, 2020 08:45:54 IST
MSP model's utility is long gone; new farm laws will give farmers more market access, promote agri exports

Representational image. Reuters

Administered price mechanisms can be used in a targeted fashion for fulfilling narrow objectives, but they do not work well for long period. Indian economy learns this lesson in fits and starts, although the corroborative evidence is right there in multiple sectors.

Administered prices of petroleum products led India to raise oil bonds and it took years of political mettle and policy courage to link retail prices to the global wholesale prices. Administered rates on small saving schemes are only now beginning to get realistic, but they are still hindering interest rate transmission, leading to continued stress for India’s banking system. Successive governments have tried to move away from the administered rates on provident funds by introducing more defined-contribution products.

So if administered prices don’t work in so many areas, why should Indian agriculture be any different? Albert Einstein had said that doing the same thing over and over again, but expecting different results was insanity. However, Indian establishment thinking believes it is sound policy making.

Minimum Support Prices (MSP) are a legacy of the post green revolution period. As the productivity and output of the Indian agriculture rapidly increased and the government of the day tried to bridge food security concerns, MSPs were introduced. The idea was that the government will procure all the agriculture produce that is being sold in the open market under the MSP. In effect, it was meant to be a signalling mechanism for the open market, to ensure that the buyer of the last resort need not step in on behalf of the sellers – the farmers.

While this worked fine for some time, when the central government indeed was the largest buyer anyway, things are different fifty years later. Today, the Central government sets MSP for 23 crops (7 cereals, 5 pulses, 8 oilseeds, raw cotton, raw jute and the fair and remunerative price for sugarcane). However, the Central government does not buy all quantities of all these crops. And states are under no legal obligation to honour the MSPs when they procure, although states try.

Eventually, farmers who have the benefit of large landholdings which produce marketable surplus, get ahead in the race to sell to the government.

The farmers who actually need the MSP protection do not always get access to the government procurement. And what government ends up procuring is generally middling quality surplus as fixed prices, sometimes only to rot in the Food Corporation of India warehouses.

So, the government finally came up with the obvious solution – give farmers more market access. Let the farmers come together and collectivize and find private buyers, while strengthening their production chain to diversify and produce better quality. In fact the three farm acts, which as ordinances and later as laws have been in force since June, have already had impact.

Farmers in Nashik, part of the Sahyadri Farms farmer producer organization (FPO), have been doing brisk direct to customer selling to city dwellers this year, leveraging social media and e-commerce. In Piparia, near Hoshangabad, Madhya Pradesh, a small farmer acted successfully against a large private firm to get contracted price for his paddy using new farm laws. Another small farmer in Maharashtra used the new laws in an interstate trade dispute and got fair price from a trader in Barwani, Madhya Pradesh. The Federation of Andhra Pradesh and Telangana Farmers for Market Access issued a statement in support of the new farm laws.

The new laws will bring in supply chain modernization, farm gate buyer access and technology intervention for the farmers as well as logistics alike. Firms like Ninjacart and WayCool are already creating that backbone needed for a small but enterprising farmer to sell to private buyers on contract. AgriTech players are waiting to inject the green shoots of technology-led innovation for farmers who are willing to adapt and to adopt ideas.

And all of this is required for Indian agriculture and more. As farm productivity improves in India, local consumption won’t keep pace. Food security remains an issue to address, but India has made rapid strides in terms of food self-reliance. The real benefit of greater market access will come from exports. India has set a target of $60-billion in agriculture exports by 2022. In the last two financial years, agriculture exports have been under $40-billion.

This is where the new farm laws will help. But it will help those who are willing to look beyond their privileged MSP-led status quo lens. Farmers who want the MSP regime alive – and some are demanding its expansion in the ongoing protests – may eventually lose out to more enterprising brethren from around the country.

Indian agriculture needs more investments in food processing, farm gate infrastructure, logistics and transportation, cold storage and in technology-led market making. The private parties will put their money on these projects only if they are allowed to buy in the open market, backed by stable trading terms, quick dispute resolution and a long-term investment horizon visibility.

The Minimum Support Price model has already become Maximum Status quo Patronization for the detriment of Indian agriculture. There is no better time to open the possibilities of a bigger market for Indian farmers.

The author is Director, Smahi Foundation, a public policy think tank. He is based in Pune.

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