Farmers protest: Market-friendly options for ensuring MSP

farmer bill 2020
Although the new farm laws will encourage private investments in farm infrastructure, they cannot ensure stable and remunerative prices for farmers.

By A Amarender Reddy

Indian farmers are up in arms against the three new farm laws that are introduced to open up agricultural economy and expose the sector to free market opportunities. The farmers fear that these laws will expose them to market volatility by destroying the mandi system and the assurance of the minimum support price regime. They demand guaranteed minimum support price for their produce. Though the MSP policy insured paddy and wheat farmers against the vagaries of the market and assured them just prices, it neglected other crops such as pulses, oilseeds, fruits and vegetables, resulting in mass undernourishment among children and women. Under the existing MSP policy, farmers who cultivate pulses and oilseeds are exposed to market uncertainties, leading to low production, low profitability and excessive dependence on imports.

The farmers demand MSP for all crops – a task that will need huge budgetary allocations that make it an impossible solution. This will require the support of state and local marketing boards. States like Punjab are in a position to procure major crops like paddy and wheat, while states like Bihar and Orissa have limited capabilities. Because of this, Punjab and Haryana farmers receive higher prices than their peers in eastern states.

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Assuring MSP for all crops not possible

A major problem here is that there is no proper procurement mechanism except for paddy and wheat. Procurement of the remaining 21 crops for which MSP is announced has always been in limbo. Although some states are procuring pulses and oilseeds under a decentralised procurement system, they cover less than 5% of the production.

India cannot depend on achieving the target of doubling farmers’ incomes just by procuring only paddy and wheat, and that too in a handful of states. The MSP policy in force discriminates against rainfed farmers who grow pulses, oilseeds, fruits and vegetables. They constitute more than 70% of the 12 crore Indian families that are dependent on agriculture.

Even under ideal situations, the actual procurement at MSP cannot cover more than 20% of the farmers, hence cannot be a solution for raising farmers’ incomes. The actual procurement was less than 5% of the market arrivals in the case of pulses and oilseeds. Even for paddy and wheat, the purchases covered just about 20-30% the farmers in 2019 season. The oilseed prices hovered around 10-30% of the MSP in most markets during the recent kharif season. The biased policy has led to large-scale import of edible oil every year, costing India’s exchequer close to Rs 70,000 crore. Moreover, fruits and vegetable are entirely out of the purview of the MSP procurement policy.

In the current scenario where the country has buffer stocks exceeding 2-3 times of the normal requirement, the MSP policy will do more harm than good. Now it is time to broad base the policy to other crops to encourage crop diversification to ensure nutritional security.

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New farm laws encourage investment

With the government intervention in food markets, the private sector has virtually avoided investing in the sector. Corporate investment constitutes less than 2% of the total investment in agriculture and less than 0.5% of the total annual investment by India’s corporates. In the absence of large investments by the corporate sector and the dominance of petty traders, there has been no large investment in warehouses, cold chains, collection and aggregation centres, and transport logistics in agriculture markets. This means agricultural markets and trade are operating with huge inefficiencies and outdated technologies.

The new farm laws provide congenial long-term environment to promote free market in which price discovery will be based on demand and supply. This will incentivise crop diversification into high value crops such as pulses, oilseeds, fruits and vegetables. It will also encourage huge corporate investments in food processing and supply chain development as well as in retail sector. This will ultimately enhance farmers’ incomes through backward linkages.

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Modified MSP policy as price insurance

Although the new farm laws will encourage private investments in cold chains, warehouses, collection centres and aggregation centres, they cannot ensure stable and remunerative prices to farmers. Hence, there is a need for modifying the past MSP policy to safeguard the farmers from high volatility and low prices. Although crop insurance schemes like Prime Minister Fasal Bhima Yojana (PMFBY) is in operation, it covers only the production risk with complete neglect of price risk.

Under the new farm laws, the role of the MSP policy should be altered in such a way that procurement of paddy and wheat meets the needs of food security, price deficiency payment scheme (PDPS) for the remaining 21 crops, and it provides a signal price for crops with fragmented markets. Modification of the MSP policy to meet the above three objectives will require different operational modalities.

Procurement of paddy and wheat

The first objective of meeting the needs of procurement of food grain for the public distribution system (PDS), the existing price support scheme (PSS) for paddy and wheat needs to be continued with an emphasis on decentralised procurement with more responsibility on state government agencies, cooperatives and farmer producer companies.

Under the PSS for two commodities, the government is spending about Rs 2 lakh crore every year on food subsidy. To expand it to all 23 crops, it may need up to Rs 18 lakh crore, which is beyond the capacity of both central and state governments.

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Price deficiency payment for remaining 21 crops

The remaining 21 crops for which MSP is announced need to be covered under PDPS, under which farmers are paid the difference between MSP and the market price. The farmers are free to sell in open market. This is the most efficient method, as it eliminates all logistic costs relating to procurement, storage and offloading. It is neutral to crops and geography and be implemented even in the remotest parts of India.

Rolling out of PDPS is easy across the country, as all the necessary information for direct transfer of price deficiency payment are already available. The government has already collected farmers identification, land records, and bank accounts under the PM-KISAN scheme. The model price for most commodities in APMC markets is already available under AGMARKNET. The only additional input required is the quantity sold by each farmer. This information can be calculated based on the acreage data collected by state agriculture department at the beginning of the season or from the actual sale receipts.

The PDPS was implemented in Madhya Pradesh under the Bhavantar Yojana. However, there are some design problems in the scheme. Some problems in estimation of model price led to collusion among traders and farmers to artificially push down the model price, so that the deficiency payment was higher. These design problems in estimating model price can be overcome by benchmarking with international price or with historic price, which is immune to manipulation.

The rolling out of the PDPS scheme is not restricted by the capacity of the government agencies to procure from APMCs. This can ease the fear of farmers that the APMC markets will be neglected under the new laws.

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Price signal for scattered markets

The price support scheme covers paddy and wheat, while PDPS will cover the remaining 21 crops. Still there are some crops that are not covered by PSS or PDPS, which are generally thinly produced in wide areas and have fragmented markets. For these crops, estimating the model price may be difficult as there are no nation-wide markets. There is scope for exploitation of these farmers by middleman due to the fragmented nature of markets. To safeguard these farmers, modified MSP policy should provide a signal price, so that all market participants will adhere to the signal price in the long run in the absence of markets for price discovery.

Overall, with the implementation of the new farm laws, role of MSP policy also needs to change to accommodate pro-market price insurance policy options.

(Dr A Amarender Reddy is principal economist, ICAR-Central Research Institute for Dryland Agriculture, Hyderabad. The views expressed in this article are personal. He can be contacted at )