A fundamental distortion in farm policy

Issue:

Looking at the way the agrarian crisis has built up in different pockets, it does appear that the overall approach to agriculture is marked by reactive, rather than clear-sighted, proactive thinking. Almost all policies are geared towards ‘price’. It is assumed that getting this right is the panacea for all the problems.

Major issues with MSP:

  • While MSP is effective for rice and wheat, where there is physical procurement by the FCI, it is only indicative for other crops. Thus the concept of MSP has distorted the market. When the MSP of soyabean is increased, market prices would increase even if the crop is good, as the MSP sets a benchmark. The MSP hence becomes an income-setter rather than a fair market price. Its contribution to inflation has also been distinct.
  • The recent intent to criminalize sales taking place below the MSP makes no sense as the MSP does not distinguish between grades; it refers to an average fair quality.
  • Procurement has been fixed for rice and wheat which is linked directly to the PDS. The back-to-back arrangement works well but is restricted to specific crops. Further, being an open ended scheme, the FCI has often been flooded with surplus grain which leads to problems of storage and wastage. There is a need to have minimum stocks of all such vulnerable commodities. Therefore, procurement and price stabilisation has to be undertaken for other commodities if it is to be meaningful.
  • The Essential Commodities Act can be invoked at any time to restrict the amount that can be stored by the wholesaler and retailer. While the concept sounds right as it can tackle hoarding, the point missed is that most crops are harvested once a year and then stored for the rest of the year.
  • Trade policy is warped for farm products. At times, there are bans on exports. In times of shortage the time taken to recognize a shortage and import through a bidding process is long and time consuming. Often by the time imports arrive prices are already on the descent.

Solutions:

  • The MSP should be linked with procurement which in turn should not be open-ended or else there will be distortion in the market.
  • Rather than protecting the income of farmer, the incentives should be to increase productivity, which can mean access to seed and irrigation.
  • Making the NAM (national agriculture market) real is a long-term solution but linking the same with contract farming or direct sale in towns and cities could be better still.
  • Prices should always be determined by the market to reflect the demand-supply dynamics, and there should be no intervention.
  • Instead of focusing on prices to deliver income, the government should ensure that all crops are insured at least in the vulnerable areas.
  • All farm loans should be linked with insurance so that the bank gets covered for loan loss while the government pays its share on insurance premium (which the present crop insurance scheme is supposed to entail).
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