The best of both sides | Ashok Gulati writes: Why MSP should not be legalized

Some activists are proposing shortfall payments. Several cost estimates for such a system are submitted. The problem with such a system is that if the MSP is said to be legal, there will be no real market price below the MSP. Then the government becomes the open buyer of all the goods for which the MSPs are declared, which is 23 as per day. If someone argues that the MSP is illegal, and agricultural markets exist and price discovery is possible, but farmers need to be compensated for the difference between the MSP and the lower market prices as payments for the price shortfall to farmers, we are talking about a different policy. — to make MSP an income tool. The disadvantage of this policy is that when the traders know that the government will compensate the farmers separately from the MSP and market prices, they may increase the market prices even more, and there are more chances that the farmers and traders will agree. in showing market prices that are much lower than MSP. That will make it very difficult to measure the hit to the financial exchequer. The deficit pricing method was tried in earnest in Madhya Pradesh, and after just one season, the government had to abandon it for this reason. If the government wants to make MSP more effective (not legally), it can create a stabilization fund of around Rs 25,000 crore, with a focus on pulses and oilseeds for which India is a countrywide consumer.

It is worth noting that the 23 MSP crops constitute about 30 percent of total agriculture. Among these 23 crops, MSP is effectively applied in the case of rice and wheat, that too in a few countries. The Center’s latest Situation Assessment Survey revealed that more than ten percent of farmers sold their produce to MSP. It may also be noted that this MSP policy is an offshoot of the severe grain shortages of the mid-1960s. It will not be economically wise if the same policy is implemented when India is abundant in basic commodities.

Now, let’s look at the non-MSP agricultural sector that faces free markets. Between 2010-11 and 2022-23, the most recent data available, fisheries have grown by 8.2 per cent per year, meat by 7.3 per cent, eggs by 6 per cent, milk by 5.3 per cent, and horticulture by 4.7 per cent per year. None of these agricultural commodities have an MSP, and they are more perishable than wheat and rice. But wheat grew by 2.5 percent and paddy by 3.2 percent in the same period. This clearly shows that market-based programs have fared better than the government-controlled MSP regime for wheat and rice.

However, this does not mean that markets are perfect. They are often distorted by the government through export bans, restrictions on private trading, futures and options at the drop of a hat, and so on. All this is done in the name of keeping agri-inflation low for consumers. Therefore, there is an inherent consumer bias in agricultural pricing policy, which is against the farmer. Among the G20 countries, according to the OECD, India is the only country with negative Producer Support Ratios (PSEs), meaning that India consistently taxes agriculture by depressing market prices. What Indian farmers need are free markets, the creation of agri-value chains – like the AMUL model in milk – where farmers can get 75 to 80 percent of what consumers pay. Legalizing the MSP would be retroactive, incompatible with economic liberalization.

Gulati is an Honorary Professor at ICRIER. Viewing is personal