Time for a closed-ended MSP programme


Attention so far has been on the distribution side of the food problem and alternatives such as cash transfers have been suggested. However, another serious problem that we confront when handling foodgrains is on the procurement side which has come in the way of the development of the farm sector.

Food procurement by the Food Corporation of India (FCI) is essentially a process with two objectives. The first is to ensure a fair price to the farmer and the other is to enable food security in terms of creating a buffer and a mechanism for food distribution through the public distribution system and other social programmes. To achieve these goals, we have the concept of a minimum support price (MSP) offered by the government and FCI, which physically handles foodgrains. Two aspects of MSP are that they are announced for all crops at the time of sowing, and the second is that procurement takes place only in rice and wheat, and to a minimal extent in coarse cereals. The curious thing about procurement is that it does not take place in other products because market prices are generally higher. It is also true that FCI does not have the machinery in place for the same. Lastly, procurement is active in only a few states: Punjab, Haryana, Uttar Pradesh for wheat, and Andhra Pradesh, Chhattisgarh and Tamil Nadu additionally for rice.




The starting point of problems in the procurement process is that it is an open-ended scheme, where FCI has to perforce accept any fair quality of rice and wheat from farmers. There is no choice here and intuitively it can be seen that this system tends to create a farmer bias for rice and wheat. This problem will get exacerbated as output keeps rising as we also need to create the logistics support to ensure that we can progressively handle these quantities. In fact, FCI was to be the last resort for the farmer, but has ended up becoming the first preference due to the continuous increase in MSPs. 

There have been repercussions on both FCI as well as farming in general on account of this scheme. The first is that FCI has been procuring larger quantities of rice and wheat as MSP has been continuously raised by around 10% every year, making it attractive. This has led to surplus stocks, which are around twice as much as to be maintained, based on the buffer stock norms specified by the government. There are presently around 25-30 million tonnes lying with FCI. The economic cost of these products, as mentioned by the Economic Survey, is Rs1,500-2,000/quintal, which means around Rs43,000-52,000 crore is tied up in warehouses. The second unintended consequence is that FCI becomes the biggest hoarder of foodgrains and leads to anomalies, where shortages in the commercial market lead to higher prices for millers even when production reaches peak levels as FCI is holding on to surplus stocks.

This policy of open-ended procurement combined with higher MSPs has created more serious problems for agriculture. To begin with, farmers prefer to grow rice and wheat because the prices received are getting better by the day. Therefore, they are reluctant to migrate to other crops such as oilseeds and pulses, where typically the nation runs an import bill. This has skewed the cropping pattern in the country. Further, excessive growth of rice and wheat also tends to affect the water table level as these crops consume more water, thus affecting long-term prospects of farming. Also, given that these crops use more fertilizers and pesticides which enable rapid growth, the quality of the soil tends to deteriorate over time. All this means that agriculture will face problems going ahead.

What are the solutions here? First, the procurement system has to be made closed-ended where FCI can go up to a certain margin over the buffer norms. While this can be based on a first-come-first-served basis, the unique ID can be used for bringing about a quota system where FCI purchases only up to a certain level from every farmer. This would be a fair way of going about it. Alternatively, farmers can be provided cash transfers which will be the price difference between the market price and MSP. This can be achieved in a transparent manner, if they can be made to sell on electronic commodity exchanges where there is an audit trail and one can eschew adverse selection.

On the cropping side, the government should aim at providing incentives to farmers growing other alternative crops such as pulses and oilseeds. A cash bonus could be considered, based again on the unique ID. Subsidized credit, power or seeds in the form of a package can be provided to draw farmers to these crops.

We certainly need to move away from open-ended schemes while retaining the ethos of not diluting the present benefits to farmers in a smarter manner. Or else the skewed farm matrix will continue to dominate our farm topography, which is not desirable.

Madan Sabnavis is chief economist, CARE Ratings.

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