Agriculture is a sensitive subject from both the political and the economic viewpoint. More than half the labour force is employed in this sector; a large majority of the population lives in rural India; a rise in disposable incomes among those associated with agro-related activities has a domino impact on the sale and manufacturing industry of consumer products across the country; a rural India upset with the Government of the day can dictate the outcome of an election; and, one farmer committing suicide can wipe out the positives of an incentivising policy of the Government to attract investments worth many thousand crores of rupees. It’s not surprising that Governments since the past have sought to devise ways to keep the agricultural sector happy — though the results have not always been of the desired kind. One of the most durable market intervention tools to ensure a just deal for the farmers has been the formulation of the Minimum Support Price — in short, the MSP — that the Government ensures farmers for the produce it buys from them.

Once in a while, generally once a year, a new MSP is announced, and it is invariably followed by raucous criticism from opposition parties who accuse the regime of effecting a paltry hike and betraying the farmers. This has become a pattern, and it was dutifully followed when the Narendra Modi Government recently approved an increase in the MSP for all Kharif crops for the year 2016-17. The increase ranged from three per cent to nine per cent, based on the type and sub-type of the produce. The Government also announced a bonus over and above the MSP to boost the cultivation of pulses and oilseeds (Rs 425 per quintal for pulses and Rs 100 per quintal for oilseeds). The figures were approved by the Cabinet Committee on Economic Affairs based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). Opposition party leaders reminded the Prime Minister of his promise to provide the farmers a price that was ‘cost plus 50 per cent’. In other words, they demanded that the Government offer the farmers a MSP that ensured a 50 per cent profit margin after taking care of the cost of cultivation.

The ‘cost plus 50 per cent’ formula has a strong backer in eminent agricultural scientist MS Swaminathan, who headed the National Commission on Farmers in 2006 and strongly recommended this solution with a view to both restoring the dignity of the farmers and empowering them economically. He once commented, “Pharma companies work on a profit of 500 per cent. There is no business that works on less than 50 per cent profit. So why must farmers suffer all the time?” This should be music to the ears of the Government’s critics who have been seeking to spread the impression that the incumbent regime is anti-farmer. The incentive to accuse is all the more, given that agriculture-dominated States of Uttar Pradesh and Punjab will be voting soon for their Assemblies. The Centre is not oblivious to the design; there is a belief among sections of the Government that the ‘cost plus 50 per cent’ formula should at least be implemented in phases to take the sting out of the attack. But they also draw attention to the fact — something which opposition leaders tend to ignore — that the cost of production in farm sector has been relatively low over the last two years. Additionally, global prices for farm produce have been down. Also, the low rates of inflation have had a salutary effect on farmers, as they have had on the rest of the population, thereby ‘adding’ to the income. Yet, there is a strong suggestion that the MSP could have been higher at least for rice (which has seen a mere 3.6 per cent increase over the last year).

Ideally, low inflation coupled with falling cost of production should leave the farmers with more money in their hands even if the MSP has not been as generous as they may have hoped for. But the drop in global rates for the farm commodity does impact them adversely, leading to the argument that a reasonable MSP becomes even more necessary when such price falls take place. For instance, according to a report, exports of Indian agricultural products hit a low of $24 billion in the fiscal year ending March 2016, as compared to $33 billion during 2013-14. It must be remembered that not just the Government, but also the private players, buy agricultural produce from farmers for export. If the price being fetched in the international market is low, then the farmers are impacted too. Of course, the Government can subsidise such exports to provide a buffer to the farmers, but the idea of subsidy is not sustainable, nor can it in the long term provide relief to the farmer. Besides, at a time when the Government is working out ways to streamline subsidies, the addition of new ones is not desirable — although in extreme situations it may be necessary.

It’s not just falling global prices that have been impacting Indian agriculture; countries such as Nigeria and Bangladesh, two prominent markets for Indian rice, have imposed duties that have made our exports non-competitive in those markets. The export of Indian non-Basmati rice to Nigeria fell by more than 80 per cent in the April 2015-February 2016 period. Yet, a higher MSP that is driven more by political consideration than economic sense would be more of a problem than a solution to the crisis.

It has been undoubtedly established that a MSP which is higher than what the economy can absorb, can result in high food inflation. A study conducted by the faculty at the Indian School of Business in Hyderabad found that hefty hikes in the MSP for wheat and rice over the years (2005-12) had led to food inflation. (It had had other consequences too, as a result of farmers offloading as much of their produce as they could to Government agencies. For instance, it burdened an already creaking and inefficient storage system that the Food Corporation of India manages; according to news reports, as much as 40,000 tonnes of food grain procured from farmers only too eager to sell at the higher MSP were damaged during 2014-15 in the FCI godowns.)

A Working Paper of June 2015, prepared for the National Institute of Public Finance and Policy (NIPFP), New Delhi, also acknowledged the link. Its authors said, “Minimum Support Prices are also found to be important drivers of food inflation in India. The rate of increase in MSP has a significant impact on next year’s Wholesale Price Index (WPI) inflation.” While a periodic hike in MSP is by no means the sole culprit for food inflation — the massive increase in consumption by a burgeoning population is also a contributor — it is a factor that cannot and should not be buried under political rhetoric.

Admitting that “several studies” had established the high food inflation-high MSP link, the NIPFP paper observed that a rise in the MSP “impacts food prices as the 25 commodities on which MSP are announced, constitute nearly 7.3 per cent of the WPI basket.” The MSP, which is the floor price, is lower than the wholesale price. The paper went on to explain that higher the floor price (MSP), the higher it would push the wholesale price and lead to food inflation — which hits the nation, and the farmers themselves the most. The study used documented evidence to establish the case for produce such as pulses, wheat and rice. It drew the reader’s attention to the fact that the rate of MSP increase during 2012-13 was considerably higher than from 2001-02 to 2006-07; that cereal inflation was, as a consequence, in double digits in five out of the previous eight years; that rice inflation averaged 8.8 per cent between 2005 and 2012-13, and wheat inflation was at nine per cent. It may be recalled that between 2004-05 and 2013-14, when food inflation troubled the nation, the MSP for wheat grew at a compounded annual growth rate of 9.1 per cent, while that of rice went up by 9.9 per cent.

Most experts, whether they defend a high MSP or are fearful of it, tend to agree that there is a need to review the floor price regime. It has been skewed in favour of rice and wheat, for example. Farmers driven by attractive MSPs for these products have ended up not diversifying into other crops. This has led to two problems. The first is that on occasions output exceeded demand, resulting in a crash of prices which hurt the farmers. The second is that the over-dependence (as a result of the high MSP sop) on these products has kept the farmer away from experimenting with other, more lucrative crops — cash crops, for example — and enhancing his income. Many experts are, therefore, coming around to believing that the MSPs should be crop-neutral and must encompass any crop that the farmer decides to cultivate.

Of course, the Government can always, and should, use the MSP as a market intervention tool in addressing immediate and looming crises. For instance, there had recently been a surge in the price of pulses as a result of a sharp drop in domestic production due to unfavourable weather conditions from the last two monsoon seasons. Retail price hit the roof at over Rs 100 per kilogram. During 2015-16, India had to import six million tonnes to meet the demand (domestic production was expected at 17 million tonnes), while in 2014 it had imported four million tonnes. In the latter year, domestic production had fallen by nearly two million tonnes. Bearing the situation in mind, the Union Cabinet cleared a proposal to import nearly 100,000 tonnes of pulses from Mozambique during 2016-17; a deal for long-term imports was inked during the Prime Minister’s visit to that country recently. It is in this backdrop (with a view to promoting the cultivation of pulses) that the Government has considerably enhanced the MSP for the product and announced a bonus over and above the MSP.

It must, however, be remembered that a mere hike in the MSP is not the end of the problem. The Government must tweak its procurement system to make it more effective. Expert after expert has been emphasising on the need to do so. According to a recent National Sample Survey Organisation study, many farmers across the country are unaware of the MSP regime and the procurement agencies they need to approach. In addition, there is the perennial problem of leakages in the Public Distribution System (PDS). After all, the principal motive behind the MSP is two-fold: To give the farmers a just price, and to make part of the product thus procured available to the needy through subsidy via the PDS. A simple explanation of the ‘leakage’ is the difference between the supply of food grain by Government agencies and the availability to the end consumer through the PDS. If the system fails to deliver in the last mile, it effectively nullifies the benefits of the MSP in a holistic sense and leaves the Government holding the wrong end of the stick — first paying the MSP and then burdening itself with subsidies through the PDS that do not reach the intended beneficiaries.

With a good monsoon in the current season, the Government can expect its interventions through the MSP to bear fruit. We could have a relatively more comfortable position in the production of essential grains such as rice, wheat and pulses. But this has its inbuilt challenges which the Government needs to tackle. An abundant produce requires effective storage; the FCI has to modernise and streamline its godown facilities. Also, if there is a glut, market prices can crash, adversely impacting the farmer. After all, the farmer does not sell his entire surplus product through the MSP regime, nor can the Government buy it all; a significant portion is sold in the open, which is subject to the vagaries of market conditions, including the play of demand and supply.

(The writer is a senior political commentator and public affairs analyst)