BS Manthan: Explore contract farming, MSP law no solution, says agri expert

Business Standard Manthan 2024: Agri economist Ashok Gulati, while discussing the agriculture sector, suggested why alternative policy options such as contract farming are better than MSP

Amid fresh protests by some farmer groups seeking legal guarantees for the minimum support price (MSP), agricultural economist Ashok Gulati said that alternative options such as contract farming should be explored.

He argued that giving MSP a legal shield could lead to surplus production. In such a scenario, traders might abandon farmers, requiring government intervention to purchase the excess produce.

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Gulati made these remarks during a panel discussion titled ‘The role of agriculture in a developed India of 2047’, organised at the Business Standard Manthan 2024 in New Delhi.

Objective behind MSP

Gulati explained that when MSP was introduced, India faced significant deficits in wheat, rice, etc. To address this, new technologies were introduced to boost production. However, due to a mismatch in demand, prices fell, necessitating government intervention.

He highlighted that last year, to control wheat prices, the government sold its own stock, causing market prices to drop to MSP levels. This unintentionally made MSP the de facto maximum support price, which as per his calculations, resulted in a loss of roughly Rs 40,000 crore for the farmers.

Gulati pointed out that the government's actions, including export bans and stocking limits, followed by the sale of its own stock to appease consumers, resulted in the trust deficiency among the farmers.

What do farmers want?

He said that the farmers are seeking a better income through diversification and minimising price risks. "They are not only demanding the legalisation of MSP but also an increase in MSP to C2 (comprehensive cost), which would raise MSP by 25 per cent in one go."

Gulati emphasised that increasing prices for all 23 crops by 25 per cent at once would create a surplus without a corresponding increase in demand. Legalising MSP could dissuade traders from buying, necessitating government intervention in purchasing.

What are alternative options to reduce price risk?

Gulati suggested that contract farming and futures markets could be alternative options to address this issue. Many developed countries use futures markets to manage price risks.

“You look towards what the price is going to be after four months when you bring produce into the market…but we suspend futures at the drop of a hat, so there is no no messenger telling you what the price will be,” he explained, adding that the government should come only as a last resort when there is an extreme crisis.

Gulati cautioned against legalising a route that would undermine markets, suggesting that such a move would set India back 20 years, rather than propel it forward.