SAYING GOODBYE TO INDIAN MSP REGIME--FINANCIAL EXPRESS 1ST JULY 2015

http://epaper.financialexpress.com/c/5732043

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SAY GOOD BYE TO MSP REGIME

Tejinder Narang

Minimum Support Price (MSP) that is annually “fixed” by the Government for 24 agro commodities of Kharif and Rabi crops is applied only to two commodities (wheat, paddy) for dedicated/open ended procurement (and over procurement too).  In exceptionally distressed years, maize and cotton too are procured as a price support operation. However in practice, remaining 20 agro commodities do not derive any benefit at all; neither there is any commitment of the Government for intervention. 

About 900 million tons of agro commodities that are produced in the country per annum, only 70-75 million are procured by the government at MSP. The system initiated from 1965s onwards thus serves only 8% of farmers and excludes balance 92%. A policy that ensures omission of more than 90% farmers is a gross distortion and cannot be seen as a shadow of a welfare policy. In other words MSP mechanism has 8% efficiency on the national scale and therefore redundant for retention.

     

Discovery of commodity prices worldwide is made daily through diverse trading practices in the market. They cannot be extrapolated on annualised basis by 2-3 years’ old outdated data tabulated by CACP. Values of agro-commodities world over have declined by 25-30% since a year ago. Any downward revision under MSP policy is inconceivable.  Averaging out cost of production in different agro climatic conditions, varied yields and costs indices of 26 states is a questionable exercise for determination of MSP.

Procurement and handling operations of wheat and paddy/rice by FCI and State Government Agencies (SGAs), including its extension to PDS, are already exposed to multiple controversies in terms of payment through Arthiyas, local taxes, poor quality, shoddy storages, shortages, pilferages and illegal diversion to the market. About 90-95% of arrivals in the market are cornered by the state agencies, crowding out the private trade—thus generating domestic inflation. If MSP regime is retained and more items are covered by state intervention, such ills will plague the nation in amplified mode.  

Take the recent case of “announcing” higher MSP of pulses by 6% and additional bonus Rs 200/qtl under Kharif phase of FY16 without defining the average or basic quality of Tur (Arhar) and Moong. Surely, the decision is prompted by shortfall of about 2 million in output pulses declared by the Agriculture Ministry. The government agencies have never procured local pulses in the past—which are in the raw form— and require sound storage structures with fumigation facilities, have shorter shelf life, need processing, polishing and packing before distribution. Thus dedicated procurement or price support operation for pulses is impractical. Higher MSP plus bonus will remain a paper price.  Assuming that some official agencies are directed to undertake this operation with subsidy, it will be the distributors /retailers/dal millers who will be profiteering because they will buy from the state agencies at the bottom values, hoard, process and then sell in competition with pulses imported by private trade at high prices.

GOI was advocating to State Governments (like MP and Chhattisgarh) for the last two years to refrain from giving bonuses for wheat and paddy to which they abided. But GOI itself is now resorting to bonuses for pulses, even though on paper!!

Relaxation of moisture content of paddy is a normal ritual. And if the government does not give in to such demands, Arthiyas and procurement officials work hand in glove under the umbrella of MSP regime.  

For wheat where MSP is routinely applied, there is a bigger aberration this year.  Out of 27 million tons procured at MSP, most of it is of lower quality/rain damaged grain that has landed in the government warehouses. Since wheat production is estimated at about 90 million tons, better quality wheat will be traded in the market or imported. Such situation also emerged in early 2002-03 when lustre loss wheat was procured. MSP thus acts as enabling instrument for the acquisition of the junked grain as well.  

MSP of wheat and paddy with promised procurement transmits signal to sow more and more of these cereals even at the cost of other crops (including pulses, oilseeds, maize) because government is the guardian angel for them. Net effect is India is a net importer of 12 million tons of edible oil and 4-5 million tons of pulses.

For sugar cane, SAP (State Advisory Price) fixed by the state is the MSP which millers must pay to farmers for vote bank politics irrespective of market realization by the millers for the sugar.  Take the case of sugar sector in Uttar Pradesh. Arbitrarily fixed sugar cane price is Rs 280/qtl, production cost of refined sugar ex-mill is at Rs 3500/qtl and market price is Rs 2400/qtl -- a loss of Rs1100/qtl or Rs 11000/metric ton.  Bad debts of millers to banks have mounted. Arrears to farmers at national level have spiked from Rs 9000 cores in FY12 to 21000 crores in FY15. Sugar production has escalated form 24 million tons to 28 million tons with carry over stock of 10 million tons.  World prices have collapsed and there are hardly any takers for Indian sugar abroad. Logically sugarcane price should scale down to Rs 170-180/qtl to set some sense in the market. Neither the Centre nor the state governments are willing to correct the distortion of SAP.

When India is moving fast towards market economy and evidence of failure of socialism is now a historical record, time is ripe to say good bye to the mirage of MSP/ SAP. There is no necessity to “fix” MSP of commodities because markets are incorrigibly volatile. Even if they are to be procured for official intervention, let the guidance be given by the market rather than the babus or economists or politicians sitting in Krishi Bhawan or in various states.

Also there could be some form of “price deficiency program” where the farmers are compensated for “average lower price realization” in the market, if that be the case, through direct bank transfers under Jan Dhan Yojna.  Such a scheme may be applied to all commodities to cover 100% of farming community.