An influential Delhi-based agricultural economist’s study that says Indian farmers bore an “implicit tax” in 16 years of the last two decades is being cited by their union leaders to block marketing reforms and press for legally guaranteed minimum support prices (MSP), says NITI Aayog Member Ramesh Chand.
“Growth is fastest where government intervention is the least,” Chand said at a 6 July seminar — “Getting Agricultural Markets Right”— organised by ICRIER and the National Stock Exchange. “MSP is needed so long as markets are not competitive.” Chand said support prices were justified when there was market failure and prices were volatile. But providing support to farmers via assured procurement at support prices was “distortionary.” It made farmers produce regardless of demand and was inefficient, as the government was spending about Rs 35 for every Rs 100 paid to farmers.
Chand thinks his brainchild — Bhawantar Bhugtan Yojana (BBY) or price deficiency payments— are a better way of giving government support to farmers. In BBY, the government pays farmers the difference between MSP and the weighted average sale price of a commodity at the state’s mandis or regulated market yards. Madhya Pradesh had tried and withdrawn it after traders reportedly gamed it. Chand says it is being tried out in Haryana since last year and has been extended to 16 commodities.
The two dozen farmers unions that forced the government to withdraw three farm laws last year after more than a year of protests want MSP to be a legal guarantee. In private meetings their leaders are citing the study that Indian agriculture is net taxed to block farm trade reforms, Chand said. He was referring to a 2018 study by Ashok Gulati of ICRIER , a Delhi-based research organisation and Carmel Cahill of OCED, an organisation of 36 rich countries. They analysed prices of 20 agricultural commodities between 2000-01 and 2016-17 and found that farmers got 14 percent less annually than what they would have got if India did not restrict agricultural exports and suppress domestic prices through stocking limits via the essential commodities act. During this period farmers got Rs 45 trillion (lakh crore) less, the study concluded.
“India has been implicitly taxing its farmers,” Gulati wrote in a newspaper article after the study was released. Gulati heads the agriculture research vertical at ICRIER. He was chairman of CACP between 2011 and 2014.
“We need to revisit the estimate (by Gulati) to check if Indian farmer is still net taxed, or now we have reached a situation where he is net subsidised,” Chand said. “This is important for policy intervention and reforms in agriculture,” Chand clarified by email to queries sent to him.
CACP had changed the method of calculating MSP in 2018. The MSPs it recommends have a 50 percent mark-up to the paid out costs of cultivation. In many commodities MSPs are higher than international prices, Chand said.
Gulati did not respond to two emails sent to his personal and office IDs.
Chand’s views will likely influence the recommendations of a 29-person committee which the Centre notified on 12 July to make minimum support prices (MSPs) “effective and transparent” and to suggest how “more autonomy” can be given to the Commission on Agricultural Costs and Prices (CACP) — the MSP recommending body— and make it “more scientific.” The committee has not been asked to study the desirability of guaranteeing MSP by law.
Chad piloted the three farm laws on agricultural marketing, contract farming and on defanging the essential commodities act, which were withdrawn last year.
Gulati’s views have resonated with farmers’ leaders. For instance, in an interview to thefederal.com, published on 13 June, Anil Jaysing Ghanvat, former president of the Shetkari Sanghatana, said India’s ban on wheat exports was imposing a “negative subsidy” on farmers. Global prices of wheat were Rs 500 a quintal more than the MSP, he said. The wheat export was the latest instance of pro-consumer bias that has informed agricultural policy since independence, he added.
Ghanvat’s Maharashtra-based farmers’ union is pro-free market. The Sanghatana opposes MSPs unlike most farmers’ unions in the country. He is also a member of the MSP committee and supports Chand’s marketing reforms.
Has the new method of calculating MSP made Indian commodities uncompetitive? The MSP of rice has been higher than its international price since the first quarter (July- Sept) of the 2019-20 agricultural year as per the price policy report of CACP. Rice is one of the commodities where MSP plays a significant role in shoring up prices. An average of nearly 48 percent of the rice output was procured in the three years ending in June 2021.
Despite the MSP of rice being higher than international prices, India has emerged as the largest rice exporter since 2011-12. This is because half of the rice exports are of basmati, for which there is no MSP and no procurement. There is a steady market for it. Basmati made up half of rice exports for several years except last year when India exported a record 16.6 million tonnes of non-basmati rice, four times more than basmati. Despite high procurement levels, domestic wholesale prices of non-basmati rice tend to be lower than MSP and international prices, mainly in the eastern states, where procurement is patchy. This is the non-basmati rice that is exported.
In wheat, where 49 percent of marketed surplus — and 36 percent of production — was procured during 2020-21, international prices has been consistently lower than MSP since the July-September quarter of 2015-16. For instance, in July-September 2018, the MSP was Rs 1,625 a quintal when the international price was Rs 1,219, according to CACP. India is a marginal players in international wheat trade.
In the rest of the 23 commodities for which MSP is declared, little or no procurement happens. So, their MSP is of little consequence. In maize, which is the third important cereal crop, there is no procurement. International prices have been a lot lower than domestic prices since July-September 2017 but has been higher since April-May 2020. The MSP has been consistently higher during this period except for one quarter.
Chand says MSP have created two kinds of agriculture: sarkari and bazaari, or those where there is government intervention and those whose prices are market-determined.
According to his study, the output of the fishery sector grew by 6.74 percent annually between 2004-05 and 2020-21 despite little or no subsidy from the government and low institutional support. Production of meat (mainly chicken) increased by 7.18 percent annually during this period. The output of eggs rose by 5.38 percent annually. That of milk and milk products by 5.09 percent, owing mainly to the abolition of the monopoly of dairy cooperatives. The yearly output of fruits and vegetables grew by 4.84 percent. But growth in cereals (rice, wheat and maize) was 2.37 percent, despite rice and wheat farmers being the main beneficiaries of the government’s procurement effort. There has also been significant growth in pulses at 4.04 percent. Elevated market prices caused by crop failures and the government’s efforts at stimulating production with MSPs to mitigate scarcity helped increase pulses production.
Incidentally, Chand and Gulati don’t agree on most policy issues. Chand had criticised Gulati’s 2018 study at a talk hosted by the Brookings Institution India Centre (as it was called then) in January 2019 on subsidies and agricultural policy. He also holds Gulati’s research responsible for India’s liberalised edible oil import policy which has resulted in a huge increase in oil consumption – and the oil bill.
“Some experts produced analysis that India had a comparative advantage in increasing production and export of cereal instead of oilseed, and it was more efficient to meet edible oil demand from imports. Convinced by such arguments, the government opened up the edible oil sector to imports again,” Chand wrote in a newspaper article in May 2018.
Gulati is sceptical about the efficacy of Chand’s price deficiency payments scheme. In April 2018, he had said in an TV interview, after the scheme was abruptly called off in Madhya Pradesh, that it was prone to manipulation by traders. The previous year, in September, he had refused to join a NITI Aayog panel on reforming Indian agriculture by 2020. He said his consent was not sought. Chand presided over the first meeting of that panel.
(Top photo: Maharashtra’s Shetkari Sanghatana believes that government policies implicitly tax far,mers by not letting them get global prices for their produce. They believe in free markets and free access to technology. Here they are planting unapproved genetically-modified Bt brinjal).