Agriculture Policy

Arvind Panagariya Says Extension of Procurement at MSP to 23 Crops Will Be a Fiscal Strain And Mainly Benefit Better-off Farmers

The government should not accept the agitating farmers’ demand to extend procurement to all 23 commodities for which minimum support prices (MSP) are currently declared, says former NITI Aayog Vice-chairman Arvind Panagariya in an op-ed article in the 9th December edition of the Times of India.

Panagariya says it will impose an additional burden of trillions of rupees on the taxpayer. Currently, 23.9 percent of the total output of rice and 20.8 percent of the total output of wheat (2018-19) is procured at MSP, as per the latest Situation Assessment Survey of Agricultural Households. With procurement already in excess of storage capacity, the extension of MSP to other crops would have to take the form of deficiency payment. The difference between the market price and MSP (calculated at cost plus 50 percent profit) would be reimbursed to farmers in cash. The output will be calculated on the basis of acreage under a crop, the estimate of yield per hectare and the market price. The deficiency payment would be not just on the marketed surplus but on the total production (including that which is self-consumed). For 2018-19, Panagariya estimates that the procurement payment would be 4.2 to 4.8 times higher than the amount paid for procured wheat and rice.

With price uncertainty eliminated for all farmers, MSP set above cost and political pressure to raise MSP annually almost certain, every farmer will increase their annual output through productivity-enhancing measures. As supply dampens market prices, deficiency payments will rise.

Assured procurement of 23 crops at MSP will check the diversification of land to fruits and vegetables for which there is no MSP.

India’s MSP payments already violate the World Trade Organisation’s rules on subsidies. A temporary peace clause on public stockpiling for food security has protected India from retaliatory action by other food-exporting countries. But the peace clause will not cover deficiency payments as they are not for food security.

Panagariya says the shelling out of trillions of rupees is bad use of public money. It will mostly benefit big farmers. The Situation Assessment Survey classifies only 54 percent of rural households in 2018-19 as agricultural.  The proposed transfer would affect both the rural and urban poor who are not agricultural. Only 29.5 percent of agricultural households have land in excess of one hectare and only 11.8 percent of them have land in excess of two hectares. As a proportion of agricultural households, those with more than one hectare are 15.93 percent and those with more than two hectares just 6.37 percent. So the massive transfers would benefit a small proportion of mostly well-off rural households

(Photo: Procurement in 2020 at Birthday Behman mandi in Punjab).