The Perpetual MSP Challenge, Solved

A.S Mittal Nov 05, 2020

Kerela becomes the first state in the country to list MSP for vegetables, on the other hand, farmers in Punjab, Haryana, and several other states are asking to Union government to ensure a minimum support price (MSP) for wheat and paddy, especially after the passage of the farm bills that reduce the importance of APMC mandis. The fear among farmers is that the government will do away with MSP and leave them to the vagaries of the private players.

MSP was introduced to push farmers to produce certain crops that the nation needed. It was designed to guarantee purchase and prices during a scarcity period of the 1960s. Indian agriculture has, since then, moved from scarcity to surplus. Now surplus stock of grain is a burden on government exchequer as well as hitting the MSP.

The Food Corporation of India (FCI) has food grain stocks of 700 lakh tonne (478 lakh tonne wheat and 222 lakh tons rice) that is 3.5 times the minimum operational cum strategic requirement of 210 lakh tons. With mounting stocks in the central pool, FCI has the option to release the grains back into the market through the open market sale scheme (OMSS) or export through other parastatals. The reform to dispose of the excess stock under OMSS or to the international market to avoid extra burden on government exchequer. According to the Ministry of Consumer Affairs, 68,000 tonnes of food grain was damaged in FCI warehouses between 2011-2018.

Wheat MSP is Rs. 19,250/ tonne but the total economic cost to FCI is even higher, including MSP, Mandi fee & Aarthiya commission, logistics, storage, handling, distribution, damage, and interest, at Rs 27,026/tonne. The cost above MSP is Rs 7776/tonne is an extra expenditure burden to be saved. Export of wheat is not viable as the international price of wheat is Rs. 16,400/tonne, indicating a notional loss of Rs.10,626/ tonne on total economic cost. In OMSS, the FCI reserve price of wheat is Rs. 21350/tonne i.e Rs5676/tonne less on total price but in an open market, flour millers are paying just Rs.19,000-20,000/tonne for wheat delivered at their gate.

The scope of subsidized wheat exports in the international market is almost nil. Even under the UN food security mission as the US and European Union are donating their surplus wheat, bearing even logistics cost. Therefore, the only option is to sell wheat locally for less than a reserve price of Rs. 21,350/tonne under OMSS to save Rs 7,776/tonne extra burden on logistics, storage, handling, distribution, damage, and interest.

Paddy processed Rice MSP is Rs. 29,180/per tonne while the total economic cost to FCI Rs. 37,026 /tonne, Rs. 7,846/tonne above MSP. In the open market sale scheme (OMSS) FCI reserve price of rice is Rs. 22,500/tonne, Rs. 6,680/tonne less than MSP and Rs.14526/tonne less over the total economic cost. Whereas the international price of rice is Rs. 28,000/tonne. To save the Rs. 7,846/tonne expenses burden on the exchequer of FCI on logistics, storage, handling, distribution, damage, and interest, it will be better for FCI should now increase the export of surplus rice.

The current MSP and Agri production management system is insufficient in doubling farmer’s income by 2022. The Central Government came up with a new Agriculture Export Policy, 2018, to increase the present $38.49 billion Agri export targeted to $60 billion, which is a challenge. It can only be met by increasing the export of processed cereals, dairy, poultry, fisheries, meat, horticulture produce, and ready to eat food.

To reduce the dependency on the import of Agri produce will also help to increase the income of farmers. India has reduced the dependency on the import of pulses as the growth rate of pulses production increased from 5.66 percent in 2009-2014 to 11.21 percent in 2014-19. Now, it is time to replicate the success in pulses to oilseeds.

India is the world’s largest importer of edible oil. As much as 70% of India’s domestic demand for edible oil is met through imports. According to the Commerce and Industry Ministry, out of the total import of Rs. 1.37 lakh crore Agri products in India edible oil import bill exceeds Rs. 70,000 crore per year. The government has to ensure a better price to farmers on oilseeds and restrict custom duty-free imports. India’s annual requirement of oilseeds is 23 million tonnes, out of which Indian farmers produce eight million tonnes the remaining is imported.

The MSP system for oilseeds failed due to low procurement. Last harvest season, the market price for soybean was 6-15 percent less than MSP and groundnut 25-40 percent less than MSP. Though sunflower MSP was enhanced by 31 percent from Rs 4,100 per quintal to Rs 5,388 per quintal farmers in Punjab were forced to sell the oilseed at rates that are 35 percent less than MSP. Rajasthan is the highest mustard producing state with a share of 44.3 percent of the total production in the country, the MSP for mustard is Rs. 4,425 per quintal but farmers sold it at Rs.3600 per quintal. The Central Ministry of Agriculture says that govt. agencies mustard procurement under MSP for oilseeds is about 66% less than its target. To reduce edible oil import dependency, India has to move towards Atman Nirbharta (self-reliant) in edible oils. Govt. agencies have to ensure full procurement on MSP of oilseeds to ensure farmers shift from grains to oilseeds.

The government has stated a goal to double farmer’s income by 2022. To achieve this goal Inefficiency for management of grain stock is painful for the government and farmers both. The government system of buying, storing, MSP, and import-exports of Agri produce has to be reformed. The cropping system patterns have to be economically sustainable and farmers should be encouraged to sow three crops in a year preferably a non-irrigated crop like a legume. Long term solutions lie in augmenting productivity, new crops to be promoted which have better international prices, new destinations should be explored to increase the export, diversifying away from wheat and paddy to oilseeds, pulses, and other cash crops.