Stung by depressed price realization by farmers much below the minimum support price [MSP] and impending general elections next year, Modi – government announced in the Union Budget for 2018-19 that henceforth, they will be assured MSP which is at least 1.5 times the cost of production.
Mere assurance of a remunerative price is of no use unless the farmer is able to sell his entire produce at this price. Keen to ensure that this happens, the government asked NITI Aayog to come up with suggestions. The latter prescribed three alternatives viz. market assurance scheme [MAS]; deficiency payments and incentives to private sector to buy farmers produce at MSP.
Under MAS, agencies of the state buy the produce directly from farmers at MSP. Under second option, the government does not buy; instead it reimburses the shortfall in price realized from sale [albeit in the market place] vis-à-vis the MSP. Under third alternative, the private sector is incentivized to buy at MSP.
In the follow through, a group of ministers [GoM] under home minister, Rajnath Singh has approved nationwide implementation of MAS covering 23 agricultural crops including wheat and rice. The scheme will cover up to 40% of the marketable surplus and cap the prices loss [difference between farm harvest prices and MSP] to be eligible for compensation at 25% of MSP. The balance 15% towards procurement cost will also be covered.
The center apart from absorbing procurement cost in full, will bear 100% of the price loss up to 20% of the MSP and half of the price loss between 20% and 25% of MSP. The states will share only half of the shortfall between 20% and 25%. Of the overall cost of the scheme, the centre’s share would be 93.75% and the states will contribute the balance 6.25%. The states will have to pay for any additional support, they wish to give.
Disposal of the stocks purchased under the scheme will be the sole responsibility of the states.
Though bandied as a revolutionary step in the overarching mission of doubling farmers income, the expected outcome is doubtful even as its implementation holds dangerous portends for both the union government and the states via increasing their respective subsidy bill and in turn, adhering to fiscal deficit targets.
During 2017-18, total payment on food subsidy under National Food Security Act [NFSA] was Rs 140,000 crore including Rs 115,000 crore towards excess of procurement price over the heavily subsidized issue/sale price of wheat, rice and coarse cereals [Rs 1/2/3 per kg] and Rs 25,000 crore as incidental cost on storage and handling. Additionally, the government spent Rs 35,000 crore for the price support scheme for pulses and oil seeds taking the total to Rs 175,000 crore.
As regards 2018-19, according to NITI Aayog, the total cost of MAS is estimated to be at a little over Rs 111,000 crore. Of this, the centre will have to spend about Rs 105,000 crore. Together with Rs 115,000 crore towards subsidy to cover excess of procurement price over the issue/sale price of wheat, rice and coarse cereals on quantity for sale through public distribution system under NFSA [assuming to be the same as last year], the total outgo would be Rs 220,000 crore.
An increase in outgo of Rs 45,000 crore over 2017-18 [Rs 51,000 crore more than the budget allocation Rs 169,000 crore for 2018-19] will have a destabilizing effect on fiscal deficit in an year when the budget will also be hit by increase in oil prices impacting other subsidies such as on fertilizers and LPG, the National Health Protection Scheme [NHPS] – that provides medical insurance to 10 crore persons with assured sum of Rs 500,000/- and recapitalization of banks to make up for the erosion in their capital base caused by NPAs [non-performing assets].
One wonders whether the central agencies such as Food Corporation of India [FCI] and state institutions have the infrastructure and wherewithal to carry out procurement operations on the scale contemplated under the scheme. The experience with similar schemes run in the past for specific crops such as pulses, oil seeds, vegetables [onion, tomato etc] scale does not instill confidence. That apart, with the compensation capped at 25% of MSP would still leave farmers dissatisfied.
Furthermore, has the government thought through the fate of millions of subsistence farmers who do not have marketable surplus [they produce primarily for self-consumption] and a vast ocean of landless workers? While, they have nothing to gain from price support scheme, they will be forced to bear the brunt of food inflation triggered by it; all the more when the quota for subsidized supply under NFSA viz. 5 kg per person per month is not adequate.
Under the scheme, the responsibility for disposal of the stocks purchased from farmers lies with the states. In order that the state does not suffer loss on its sale, it should at least realize the effective purchase price [MSP – price loss support] plus carrying cost. If, it does not – most likely scenario – then it could suffer loss [precise magnitude will depend on extent of shortfall]. This would be seriously destabilizing on finances of the state.
Clearly, the scheme is hugely negative for the finances of the centre and states besides subsistence farmers and landless workers even as the intended impact [albeit positive] on farmers offering marketable surplus is not certain.
There is an inherent flaw in the approach. The government is looking for an administrative solution to a problem that requires policy reforms. If, today the farmers are not getting a good price, it is because the markets for agri-produce are monopolized by intermediaries [in many cases, politicians or their relatives] licensed by state authorities to buy the stuff from designated ‘mandis’/market platforms.
Even as the consumer pays a high price, the intermediaries/traders pass on only a fraction of it to the farmers. The solution lies in liberating the markets from state controls and giving farmers more options to sell his/her produce. This can happen only if states bring about legislative reforms such as abolition of APMCs [agriculture produce market committees].
In view of majority of states ruled by BJP, it should not be difficult for Modi to crack the whip.