MSP hike: Not a viable policy option

Farmers in India do not get remunerative prices for their crops even as consumers complain of high and rising food prices. A year of good production often turns out to be terrible for farmers because of the price crash. In his budget speech, the finance minister proposed raising the minimum support prices (MSP) to 1.5 times the cost of production, to ensure remunerative prices to farmers and reduce the price risk they face.  The finance minister, however, did not clarify what cost of production will be considered for setting MSP. In an earlier article, Ramesh Chand, member of the NITI Aayog, had suggested a 50% margin over the A2+FL cost, which includes all paid-out costs and the imputed cost of family labour (FL). If so, MSP is already more than 1.5 times this cost for five of the six Rabi crops for which support prices are announced. Safflower is the only exception. Among Kharif crops, MSP was more than 1.5 times the A2+FL cost for bajra, tur and urad.

Farmers in India are under pressure to sell their produce right after the harvest, which makes their supply inelastic. (AP).
Photo-Financial Express

For paddy, the largest Kharif crop, MSP was higher than 1.5 times the A2+FL cost of production in 2017-18 in Andhra Pradesh, Bihar, Chhattisgarh, Gujarat, Jharkhand, Karnataka, Punjab and Uttarakhand—states that contributed more than 70% of the total rice procured. Thus, 80% of the public procurement of food grains is from the states where MSP already provides more than 50% margin over the A2+FL costs. What about the role of MSP in crops that are not publicly procured? Our ongoing research shows that without procurement, MSP is useless for farmers when it exceeds the market price, and harmful, when it is below it. Take the example of chana and arhar whose MSPs have been more than the market price in only two out of 17 years since 2000. Farm harvest price data shows that pulse traders use the low MSP as a benchmark and offer farmers prices close to MSP. Farm harvest prices bunch unnaturally around MSP when it should be higher. In game theory parlance, low MSP becomes a Schelling point for tacit collusion among traders.

What if the government heeds the demands of farmer leaders and sets MSP at 1.5 times the total (C2) cost of production? MSPs of most crops, except wheat, will have to rise sharply. How will the public procurement of select food crops at such high MSPs affect India’s farmers and its agrarian economy? MSP at 1.5 times the C2 cost will be significantly higher than the market price of most crops. Procurement at high MSP will result in rapid build-up of large government stocks that would need to be sold at a loss. Supply will increase in response to high and assured prices. Without commensurate increase in demand, market prices will fall and the wedge between the market and support prices will increase. The government will have to procure more grains and sell them at higher losses.

The fiscal costs of such a spiral have probably not been fully accounted for. The proposed MSP policy is not only unviable, but it also amounts to virtual public takeover of India’s crop economy. Can alternatives like the Madhya Pradesh’s scheme of bridge pricing, called Bhavantar, work? Under Bhavantar, the government pays farmers the difference between the MSP and the modal market price, but does not procure grains itself. Bhavantar is less distortionary and it saves the government hassles of procuring, storing and offloading crops; but it may not work along expected lines.

Farmers in India are under pressure to sell their produce right after the harvest, which makes their supply inelastic. In contrast, traders can afford to strategically wait for the right time to buy. An old rule of public economics tells us that the government can decide whether to transfer subsidy to buyers or sellers, but it cannot dictate how the subsidy will be shared between them.

The party that is more desperate—in this case, farmers—will get a smaller share of the subsidy. A large share of Bhavantar payments will go to traders—even if the government transfers the money to farmers’ accounts. How large the share would be depends on the supply-demand dynamics of each crop and market. There are already news reports about complaints of collusion among traders in Madhya Pradesh, where Bhavantar is being pilot tested. With Bhavantar, farm harvest prices will be 1.5 times the C2 costs only if the MSP is set further higher. Rising subsidy bills is not the only problem with following the C2+50% rule. There will be many other negative effects of this policy.

*First, crops with MSP account for only 28% of the total value of agricultural output. High MSPs only for these crops will discourage the much-needed diversification to fruits, vegetables and other high-value commodities, resulting in high food prices and poor nutritional outcomes.

*Second, a grains-obsessed food policy discriminates against smallholders, who have the comparative advantage in producing labour-intensive high-value commodities. Diversification to high-value agriculture is the only way millions of India’s smallholders can earn a decent income off their farms.

*Third, raising incentives for rice production in water scarce areas, like Punjab and Haryana, is also environmentally unsustainable.

* Finally, only 6% farmers sold their produce at MSP in 2013. The bureaucratic costs of extending price support to all farmers of India will be prohibitive.

India’s food and agricultural policies are geared to protect consumers more than farmers. Ad hoc policies—like storage limits and bans on futures trading, ostensibly to protect consumers—increase uncertainty and discourage private investments in markets. Instead of resorting to distortionary subsidies and market stifling policies, the government should invest in market and storage infrastructure, deregulate primary wholesale markets, encourage inter-state trade, set fair, consistent and predictable international trade policies, and invest in research and extension to increase farm incomes and accelerate agricultural growth.

PK Joshi is director South Asia, Avinash Kishore is research fellow, IFPRI. Co-authored with Devesh Roy, CGIAR research programme on Agriculture for Nutrition and Health (A4NH). This piece was originally published in Financial Express.

Policy Dialogue- Innovations in Ensuring Remunerative Prices (MSP) to Farmers: Challenges and Strategies & Launch of Global Food Policy Report 2018

Azadpur Mandi-Wholesale Market, New Delhi, India. Source: (Flickr)/ Vaishali Dassani, IFPRI

International Food Policy Research Institute (IFPRI), jointly with the National Academy of Agricultural Sciences (NAAS), and the ICAR- National Institute of Agricultural Economics and Policy Research (ICAR-NIAP), is organizing a Policy Dialogue on Innovations in Ensuring Remunerative Prices (MSP) to Farmers: Challenges and Strategies on Friday, March 23, 2018 at the NASC Complex, Pusa, New Delhi. 

This theme is selected in view of the recent budget speech by the Finance Minister to fix the Minimum Support Prices (MSPs) at 50 percent higher than the production cost, and develop effective mechanisms to ensure remunerative prices to the farmers. Increasing MSP at 50 percent higher than the production cost was long awaited demand by the farmers. The moot issue is how to implement the higher MSP for all the crops. It is in this context, this policy dialogue is planned to develop alternative and feasible options, so that farmers get remunerative prices.

The event will also be marked by the release of the Global Food Policy Report 2018.  The report looks at the impacts on food security and nutrition of greater global integration – including the movement of goods, investment, people, and knowledge – and the threat of current antiglobalization pressures. The report will be launched by Dr Shenggen Fan, Director General IFPRI along with other reputed dignitaries.

More details about the launch event can be found here.


Budget 2018: Higher MSPs are Welcome, Bring Cheers to Farmers

On expected lines, the Budget 2018-19 aimed at strengthening agriculture and rural economy. Agriculture deserves serious attention as roughly half of the population is dependent on it for food security and livelihood opportunities. During the last few months, we have witnessed farmers’ agitation silently spreading across all the states. Budget 2018 has very well packaged various provisions for making agriculture more efficient, sustainable and resilient. The key pillars to strengthen the agri sector—improved technologies, appropriate policies, effective institutions and required infra—are well reflected in Budget 2018.

Budget 2018: This will build resilience to agriculture by reducing production risks due to droughts. (Reuters)

The most significant one is accepting the long-pending demand of the farmers on minimum support prices (MSP), by fixing it 50% higher than the production cost. This was one of the recommendations of the National Farmers’ Commission, and farmers were demanding for its implementation. It is an important step, as farmers rarely get the benefits of higher retail prices. Often traders collude around MSP and procure at much less prices than the retail, by keeping a large share of higher prices. In the new regime, even if the traders collude, it will be at higher prices and will not be transmitted to retail, as these prices are determined by supply and demand. Announcing higher MSP is not enough unless it is procured at that price or effective mechanisms are in place to compensate farmers in the event of fall in farm harvest prices below MSP.

In the past, farmers responded to government policies, which led to the record production of foodgrains, horticultural crops and milk. With exception of rice, wheat and sometime pulses, oilseed and potato, the government is not procuring at MSP even if the farm harvest prices fell. We have witnessed in the past that in the absence of adequate mechanisms, the prices of majority of food commodities steeply fell and adversely affected farm incomes.

This is contrary to the target of doubling farmers’ income by 2022. It is welcoming that the FM has mandated the NITI Aayog to develop mechanisms to compensate farmers when prices fall below MSP. Recently, the MP government launched a new scheme, Bhavantar Bhugtan Yojana (price-deficit financing scheme), to hedge price risk of eight commodities. This scheme needs to be replicated in other states to discourage farmers for distress sale and ensure MSP. Feasibility of other mechanisms, namely warehouse receipt, futures trading, and export/import, may be tried so that farmer is protected from price risks. Another key part of Budget 2018 is developing 22,000 gramin agricultural markets, and linking them with e-NAM. At present, e-NAM is linked with the existing APMC markets.

Farmers, having no access to APMC markets, are deprived of e-NAM benefits. The proposal of developing gramin markets will have far-reaching implications, including farmers in remote areas will now have access to markets. In the past, developing agricultural markets were ignored that made our marketing system inefficient and fragmented with long supply chains. The traders often exploit farmers in the absence of markets. Access to markets will benefit farmers, especially small and marginal, who have less marketable surplus and high transaction costs. They will realise better prices and their marketing costs will come down significantly. The move will also generate employment opportunities for rural youth and induce input markets, especially seed.

Union Budget 2018 has provision to strengthen FPOs and women self-help groups. Since the agriculture sector in India is dominated by smallholders, aggregating them is necessary to harness economies-of-scale in production, processing and marketing. The FPOs and self-help groups need to be linked with the proposed new food parks for processing and marketing. This institutional innovation will (i) transform agriculture into agri-business profession; (ii) realise better prices due to collective bargaining power; (iii) promote agro-processing; and (iv) generate employment opportunities. It is a welcome step that the FPOs established on the pattern of cooperatives, and having transactions less than Rs 100 crore, will now be exempted from income tax. This will also encourage many start-ups to promote FPOs for production, processing and marketing.

Financing agriculture is of paramount significance to adopt improved technologies, make provision for irrigation, and go for farm mechanisation. Provision for agricultural credit has gone up from Rs 10 lakh crore to Rs 11 lakh crore. Now fisheries and dairy farmers can also avail the benefits of kisan credit card. This will further boost the dairy and fisheries sectors. In addition, aquaculture development fund and animal husbandry development fund have been created. Budget 2018 has further strengthened the Prime Minister Irrigation Scheme by allocating Rs 2,600 crore for groundwater development in 96 most deprived districts for assured irrigation.

This will build resilience to agriculture by reducing production risks due to droughts. Studies have clearly shown that groundwater development helps in accelerating agricultural growth, increasing farm incomes and reducing poverty, especially in low-income and deprived regions. Overall, Budget 2018 is pro-agriculture, which must cheer farmers, especially small and marginal ones.

P K Joshi is Director South Asia, International Food Policy Research Institute. This piece was originally published in The Financial Express

Best Practices in Food and Livelihood Security in India

Cross-posted from the FSP India website written by Jaspreet Aulakh

Delegates at the CSD-IFPRI workshop, New Delhi
Delegates at the CSD-IFPRI workshop, New Delhi

A recent conference organized jointly by the Council for Social Development (CSD) and the International Food Policy Research Institute (IFPRI) explored research gaps on food and livelihood security and existing models that could be used for successful change.

To ignore current food security issues facing India can be likened to a doctor refusing to perform surgery because the future will offer better methods, said Muchkund Dubey of the CSD.

The conference was held 14 July at the India International Centre in New Delhi, and brought together members of government and the private sector to discuss models and processes that are scalable as well as their applicability in particular situations.  The discussion also centered on topics associated with existing practices that demand more research.

Four technical sessions covered best practices related to the Public Distribution System (PDS), the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA), food security and self-help groups, and civil society organisations. The conference closed with a panel discussion on “Learning Lessons for Up-Scaling Best Practices.”

There was unanimous consensus on the definitions of best practices, food security, and livelihood security: best practices (BPs) in agriculture were defined as norms which help rural agricultural systems to self-sustain, ensuring food as well as livelihood security; food security should incorporate food availability, food access, food safety, and food nutrition; and livelihood security means income generation for the rural and urban population.

Several points were highlighted during the course of the conference. First, each state in India varies greatly in terms of socioeconomic makeup and politics, which makes the cross-implementation and upscaling of best practices based on case studies alone difficult. Second, the government and political system can make a huge difference in creating success stories. Third, the use of information technology in management of any agricultural system is necessary for creating a success story. Capacity building and diversification within agricultural systems is also necessary to protect them from shocks.

During the final discussion, Former Secretary to the Government of India Alok Sinha noted that Indian agriculture has reached a plateau; half of the population is engaged in agriculture, but it contributes to only 2-3 percent of the country’s GDP. Small projects scattered over India cannot represent the country as a whole, he said, and PDS needs to become a transparent public system where the beneficiaries know their rights. Since Minimum Support Price (MSP) and PDS are closely interlinked, the cash transfer policy can adversely affect MSP and PDS and should therefore be tested before implementation. Digital tracking is also important for procurement to end in PDS.

Agriculture impacts a large percentage of the Indian population—47 percent of the population was employed in agriculture and related activity in 2012, according to the World Bank-- and civil society has an important role serving the rural poor.

For additional coverage and lessons-learned from the conference, check out our blogs on:

Civil Society Organizations in India-- how they make a difference

Growing together, gaining together-- case studies of self-help groups


Is More Inclusive More Effective? The ‘New Public Distribution System For Food In India

Nawad, Bihar, India. Source: Vartika Singh, IFPRI
Nawad, Bihar, India. Source: Vartika Singh, IFPRI

In September 2013, the Parliament of India enacted the National Food Security Act (NFSA), which entitles two thirds of India’s population to five kilograms of rice, wheat, or coarse cereals per person per month at one to three Indian rupees (Rs) per kilogram. Five states in India—Andhra Pradesh, Chhattisgarh, Tamil Nadu, Odisha, and West Bengal—had already implemented similar changes in the targeted public distribution system (TPDS) a few years earlier using their own budgetary resources. They made rice available in fair-price shops to a majority of their population at less than Rs. 3/kg.

Data from household consumption surveys by the National Sample Survey Organization (NSSO) show improvement in the coverage of TPDS and average off-take of grains from fair-price shops between 2004-05 and 2009-10 across all states of India. However, the increase in coverage and off-take was significantly higher in four out of these five states than in the rest of India. (The policy did poorly in West Bengal.) An average household in these states purchased three kilos more rice per month from fair-price shops than its counterpart in non-treated states because of more generous TPDS policies backed by administrative reforms.

The increase in consumption of publicly-distributed rice was the highest in Chhattisgarh, the poster state of TPDS reforms. Households there used money saved on rice to spend more on pulses, edible cooking oil, vegetables, and sugar, and other non-food items. We also find evidence that making TPDS more inclusive and more generous is insufficient unless it is supported by administrative reforms to improve grain delivery and control diversion to open markets.

In a recent IFPRI Discussion paper on Is more inclusive more effective? The “new-style” public distribution system in India, the author’s highlight  the following pertinent recommendations of Shanta Kumar High Level Committee on NFSA.  They include the following changes:

  • Government of India should defer implementation of NFSA in states that have not done end-to-end computerization; have not put the list of beneficiaries online for anyone to verify; and have not set up vigilance committees to check pilferage from PDS.
  • NFSA coverage should be brought down to around 40 percent.
  • Priority persons to be given 7kg/person/month instead of 5 kg.
  • Central issue prices should be linked to Minimum Support Price (MSP) for Below Poverty Level households (suggested 50 percent of MSP).
  • Targeted beneficiaries under NFSA or TPDS to be given six months’ ration immediately after the procurement season ends.
  • Gradual introduction of cash transfers in PDS, starting with cities with a population of more than one million, extending it to grain surplus states, and then giving option to deficit states to opt for cash or physical grain distribution.

The amendments prompt further research on the possible impact that each of the aforementioned points might have on 1) consumer welfare and 2) making the TPDS more efficient.  Both aspects are important, given the high levels of hunger and malnutrition in the country along with the high levels of leakage in the PDS. Finding the right policy mix is crucial.



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