Unjustified demands

Price guarantee will kill the agri market

Two years after farmers called off their protests, they are again marching towards Delhi with multiple demands. Protesting farmers want, among other things, a legal guarantee for minimum support price (MSP), implementation of the Swaminathan Committee report, loan waivers, pensions, and a doubling of the number of work days under the Mahatma Gandhi National Rural Employment Guarantee Act. They also want India to withdraw from the World Trade Organization. While the government was negotiating with farmers till the press time, most of the demands lack basic economic logic. The timing is also intriguing. The Lok Sabha elections can be called anytime and laws can be passed only after the next Lok Sabha is constituted. The idea clearly is to put pressure on political parties to take these demands forward. The Congress, for example, has promised a legal guarantee for MSP.

The government declares MSP for 23 crops and purchases some, mainly wheat and rice, for distribution under the National Food Security Act and maintaining a buffer stock. It also intervenes in other commodities to support prices. However, providing a legally guaranteed price for all 23 commodities is simply impossible. The government does not have the resources to do this. A legal guarantee would mean every time prices go below the MSP, the government will have to procure because private traders will move out of the market. Logically, once private trade gets discouraged, prices will automatically fall. In such a situation, the government will have to buy everything. While there are various estimates of how much the price guarantee will cost the exchequer, to be fair, it is hard to arrive at a number. Also, how will the government liquidate the stock? The idea will destroy the market and will soon lead to shortages.

It is also worth noting that only a small proportion of agriculture and related output is covered under MSP. Some of the faster-growing commodities, such as milk and poultry, do not get support. Even for the crops that are covered under MSP, only a small minority of farm households benefit. The data analysed by economist Ashok Gulati and others, for instance, showed that for the agriculture year 2018-19, only 8.8 per cent of agricultural households sold any crop at MSP to government agencies. Further, the value of that produce was just 8 per cent of total output — crops and livestock. Thus, a price guarantee will not address the real concerns of the farm sector.

To be sure, farmers do face vagaries of weather and markets. Unfortunately, the challenges on the weather front will only increase with changes in the climate. It is therefore necessary to address fundamental challenges. To support the farm sector, among other things, the government is doing cash transfers to farmers. The scheme can be suitably adjusted to improve its effectiveness. The government can also work on a mechanism for price stabilisation, which can be used to intervene if prices go below a certain level. Further, it can avoid curbs on exports and stock holdings. A price guarantee will only create more problems. In fact, it is in the interests of farmers, particularly in Punjab and Haryana, to move away from water-intensive crops like paddy, which is depleting groundwater at an alarming pace and will soon become a crisis.