Supporting farmers

Govt should find ways to extend income support

The Union government got the controversial agricultural laws repealed on the first day of the winter session of Parliament. Although this is being seen as a big victory for protesting farmers, they are now pressing for a legally guaranteed minimum support price (MSP). The government declares MSP for 23 crops, but it does not buy all of them. Also, high-growth horticulture output is not covered under the system. The government has assured farmers that the existing MSP system will continue as it will need to procure foodgrains to fulfil its obligations under the National Food Security Act. However, agitating farmers are pressing for wider coverage. This would be difficult for the government to accept, and there are a number of valid reasons why it should not go down that path.

The government simply does not have the capacity to buy more foodgrains. It is already buying far more than what is necessary. According to one estimate, it would need an additional Rs 5 trillion to buy surplus crops. It will further incur holding and carrying costs, and might have to sell the stock at subsidised rates. The government does not have the fiscal capacity to undertake additional spending on this scale. Besides, such a move will add to the existing level of market distortions. Guaranteed MSP will incentivise farmers to grow only those crops and neglect others. This will create an imbalance in the market — it will have a large surplus of some crops and a shortage of others. Thus, it will only be a matter of time before a guaranteed price is demanded for every crop.
 

Another big issue with the MSP system is that it benefits mainly a small minority of large farmers. In this context, it has been suggested that private traders be mandated not to buy below the MSP declared by the government. This will kill private trade in agriculture, affecting small farmers the most, and they will be left with unsold surpluses. A guaranteed MSP will further encourage the paddy-wheat cycle, which is not environmentally sustainable in states like Punjab and Haryana. In terms of policy intervention, it is well accepted that incomes in the farm sector have fallen behind, compared to other sectors of the economy, and farmers need to be fairly compensated. But a legal price guarantee is not the solution.

The government will have to find less distorting means to compensate farmers. It needs to find ways to extend income support to them. The Union government already has an existing cash transfer scheme for farmers, which can be modified to account for the level of landholding. It would also need to find ways to bring tenant farmers and agricultural labourers into the net. The government also has a scheme to compensate farmers for lower price realisation. Income transfer is superior to MSP in supporting farm households because the MSP distorts the market with inefficient outcomes. This would also be more fiscally feasible. It is possible that large farmers would not support the idea of income transfer and continue to press for guaranteed MSP. The government thus would need to engage more widely to be able to make the right policy interventions.