India – Minimum Support for Small Farmers

In India, the agricultural minimum support price (MSP) has been frequently used as an electoral tool to win votes. The MSP hike for the 2019 kharif marketing season, declared by the central government recently, is no exception. This was the government that had retracted its electoral promise to fix the MSP at 1.5 times the cost of production on the grounds of “market distortion” and “counter-productiveness” after coming to power. Yet, it has now made a quick volte-face and proclaimed this as a “historic” increase of the MSP, presumably in view of the forthcoming general elections.

There is barely anything “historic” about this particular hike, though. Compared to the two successive regimes of the previous United Progressive Alliance government, the average annual rates of increase of the MSP for all crops, except ragi, has been lower under the Narendra Modi government. On the other hand, even before this announcement was made, in 2017–18, several kharif crops, such as tur, bajra, urad, and paddy, had already evidenced some public procurement at MSP, at 50% over the paid-out expenses plus imputed costs of family labour (A2+FL cost of production).

The most worrying aspect, however, is the implementation of these assured prices, especially for the small and marginal farmers. Evidence from various parts of the country reveals that the market prices of several major crops fell far below the announced MSP during the kharif season in 2017–18. The market price of tur in Maharashtra was 20%–25% lower than the MSP of₹ 5,450 per quintal, while that of soybean and urad in Madhya Pradesh was almost 15% and 52% lower than the announced MSPs of₹ 3,600 per quintal and ₹ 5,400 per quintal, respectively. Of what use is such a hike in MSP if it cannot be implemented?

The widening gap between market prices and the MSP is indicative of the mismatch between production-augmenting and agri-marketing policies, seemingly arising out of the fact that MSP estimations are conventionally based on a cost-plus-pricing formula that ignores the demand side of commodities. An MSP higher than market prices would lead to an unprecedented increase in production. But, in the absence of commensurate demand, this could result in a glut in the market and prices would crash further below the MSP.

The implementation of MSP in India is ensured through public procurement, though this window has a very narrow coverage. Except for paddy and cotton, other kharif crops covered by the increased MSP do not have a robust procurement system. For the 45 pulses and oilseeds procured at the MSP from 11 states in 2017–18, the procurement rate has been less than 10% for more than 60% of the commodities on the list. In the extant scenario, without corresponding changes in agricultural procurement and marketing, a mere hike in the MSP is unlikely to do anything meaningful to improve farm incomes.

The price volatility of agricultural commodities in India cannot be fully explained by production shocks alone. Nearly half or more of the price formation of these commodities takes place after the harvest. And, this is where lies the other explanation for the price volatility. The post-harvest value chain is usually fragmented with many middlemen. Asymmetric price transmission is endemic in such fragmented marketing chains. Intermediaries exploit production-induced surplus and scarcity situations to optimise their margins, while farmers end up receiving low prices irrespective of good or bad harvests. In the Indian rice markets, for example, where traders’ margins form almost four-fifths of the prices, any rise in the support price prompts traders to raise their margins further in order to compete with the government for procurement.

Whether the MSP benefits farm or non-farm actors (such as traders) will depend upon the supply–demand dynamics of the respective agricultural markets. In general, however, farmers in India are under pressure to sell their produce immediately after the harvest. This makes their supply inelastic, while traders can afford to wait strategically for the right time to buy. Moreover, in the absence of diverse marketing mechanisms, uncertainties regarding the timeliness and the stock limits of MSP procurements are likely to depress market prices, with traders taking full advantage of it. The distortionary effects of support prices are, therefore, likely to create havoc for farmers, especially small farmers who generally sell their produce at the farm-gate level to aggregators. They would be the worst victims of these low market prices, as support schemes like the MSP never reach them.

Unless interventions are dovetailed with heavy investments in marketing infrastructure, storage, and food processing, as well as changes in the Agricultural Produce Market Committee Act, 2003 to allow direct buying from farmer producer organisations and bypassing the archaic mandi system, raising the MSP alone will be useless to these vulnerable farmers.