Why making MSP a legal right is a bad idea

There’s a demand to make MSP a legal right and criminalise any purchase of agri-produce outside government mandis. Such a measure will only debilitate agriculture in this country even further. Making MSP a legal right could very well be the most disastrous policy that this country has ever adopted, with the biggest casualty being the farmers themselves.

As the protests on farm laws continues, one cannot help but wonder at the level of misinformation that is fueling these protests. This is by no means surprising given India’s penchant for bad policies and the support base that such policies create on account of vested interests. From land acquisition amendment bill to FRDI bill, several progressive measures have been stymied by whipping up fear and frenzy which has resulted in baseless opposition. However, ongoing protests seem to have breached all limits of misinformation. A long pending reform which was also a part of manifestos of Congress – the principal opposition party- and Bhartiya Kisan Union – the principal constituent of ongoing protests and had a near-unanimous approval of all policy makers and economists seems to find no backers as the discourse has turned completely emotional. However, one of the proposals floating around has been particularly worrisome. It is the demand to make MSP a legal right and criminalize any purchase of agri-produce even outside government mandis. Such a measure will only debilitate agriculture in this country even further. Making MSP a legal right could very well be the most disastrous policy that this country has ever adopted with the biggest casualty being the farmers themselves. A simple economic analysis of such a measure will tell us that prohibiting purchase of agriculture produce below MSP, especially through criminalization of such act could leave millions of farmers without an avenue to sell and possibly divert tax payers money for the benefit of traders and corporations.

A fundamental rule of economics (or rather of common sense) is that when any price floors are set – which is what MSP is going to be- then there is a surplus production. This is what we see play out every year with excess of wheat and rice being produced in the country as the most effective procurement on MSP happens for these crops and cropping decisions are influenced by the price certainty offered by such guaranteed prices. However, given the fiscal and logistical constraints, only a small fraction of the produce is purchased that benefits only few farmers (approximately 6-7%), primarily concentrated in Punjab and Haryana. Even such limited procurement leaves FCI with a massive surplus of coarse grains. For instance, the total stock of rice and wheat with FCI, as in June 2020, was approximately 99 million tonnes against the buffer stock requirements of 41.2 million tonnes. As excess stocks pile up, the financing, storage and other logistics cost goes up. This forces FCI to routinely dump the excess grains in open market and such transactions often taken place at a price much lower than the procurement cost, thereby causing massive losses to FCI which is currently pegged at approximately 2 lack crores against an equity of mere 5000 crore. It is likely that once MSP is made a legal right such procurement will only increase in terms of quantities procured but will still fall short of covering any meaningful section of the farmers. What this means is that while the number of farmers covered by MSP may increase marginally, say from 6% to 8%, it would still leave out a massive chunk out. However, with even greater quantities of stocks piled up, FCI will be forced to dump even more and the price will get further depressed. Such sale of argi produce when combined with the ban on purchase below the MSP directly from the farmers will then close out all avenues for sale by the farmers.

In the current system, those that are not able to sell their produce to the government have the option to sell it in open market. Such a system is not without its problem with no formal price discovery mechanism as well as any formal market outside the government mandis. However, it still offers an avenue to the sellers as well as purchasers to transact as prices are determined to some extent by market mechanics. However, as FCI dumps more and more, especially at prices lower than the procurement price, traders and other buyers will find it cheaper to procure the grains directly from FCI as they will be paying lower than the MSP to FCI for their purchase and will have no incentive to purchase it from farmers. It will be akin to tax payers money effectively going to fill the coffers of private and rich individuals who will be able to procure agri-produce at prices much lower than the legitimate price even as farmers are left high and dry. Another likely consequence that could emerge is a massive black market where small traders purchase grains from farmers in informal markets where they are paid a small fraction of the MSP. This would mean that not only farmers get mere pittance for his produce, the government also does not generate any revenue. In short, everyone loses.

Clearly, we have persisted with horribly wrong agricultural policies for far too long leading to a totally distorted market where no one except few middlemen prosper. Making MSP a legal right and criminalization of commercial transaction will be a seriously regressive step that will completely dilute the proposed laws.

Ravi Shankar Jha is a Senior Investment Specialist, Invest India

*Views expressed are personal