On November 30, 2018, tens of thousands farmers – coming from all parts of the country – congregated on the national capital to register protest over their financial distress arising from un-remunerative price realization from sale of their output and ever increasing burden of indebtedness.
Quite unlike protests in the past when their demands were restricted to specific areas such as timely payment of sugarcane arrears, reduction in power tariff, lowering GST etc, this time around, they have raised the pitch. They want a special session of the parliament to be convened to discuss their problems and pass two legislations [a private members’ bill has already been submitted to the chair].
These are: (i) a law to guarantee minimum support price [MSP] for all crops based on recommendations of National Commission on Agriculture under Dr MS Swaminathan [2006]; (ii) an enactment on farm loan waiver [albeit one time].
If, these two laws get enacted, this could be fiscally catastrophic. To understand the implications, let us look at how MSP is fixed and its connect with subsidy.
To incentivize farmers for increasing food production on the one hand and make it available at affordable price to the consumers especially, majority of the poor, the government runs an elaborate system. Under it, the state agencies such as Food Corporation of India [FCI] procure from the farmers at the MSP and arrange its supply to beneficiaries through the public distribution system [PDS] at price much lower than the cost of procurement, handling and distribution. The differential amount is reimbursed to the agencies as subsidy.
Under the National Food Security Act [NFSA], 5 kg of cereals per person per month is made available @ Rs 3 per kg rice, Rs 2 per kg wheat & Rs 1 per kg coarse cereals to 67% of India’s population or over 800 million persons. With low price covering barely 1/10th of the cost and the mammoth quantity delivered under NFSA about 60 million tons, this entails food subsidy of Rs 140,000 crore [2017-18]. An additional Rs 35,000 crore was spent on price support for pulses and oil-seeds taking total to Rs 175,000 crore.
With inclusion of more crops under MSP and using the methodology recommended by Dr Swaminathan commission viz. 50% profit over cost of production [paid out expenses or A2 plus family labor (FL)] for its determination – already implemented by the Modi – government – during the current year, the expenditure on food subsidy is expected to cross Rs 200,000 crore.
But, farmers want C-2 cost [in addition to A2+FL, this includes imputed cost of owned capital and land] to be used for calculating 50% profit. This is illogical as having already provided for return on owned land and capital under C-2, to give profit over and above this would be fortuitous. Yet, if the government accedes to this demand, there would be hefty increase in MSP leading to further increase food subsidy payments.
If, on top of this, the MSP also gets legal backing, this will have mind-boggling implications. Apart from having to give it to the farmers selling their produce to state agencies [albeit for meeting the requirements of PDS], even those selling in the market place will be entitled to claim reimbursement for the shortfall in realization [mandi price] vis-à-vis the MSP. Even subsistence/marginal farmers who produce food for self-consumption will qualify for reimbursement. In short, almost the entire food production of 285 million tons [target for 2018-19] will come under guaranteed MSP.
Consequently, the center will be forced to give additional subsidy to compensate for the shortfall in market/mandi price vis-à-vis MSP on food sold/consumed outside NFSA/PDS system or over 200 million tons. Even assuming a differential of Rs 5 per kg, the outgo would be about Rs 100,000 crore annually. This will be over and above Rs 200,000 crore currently being spent for distributing 60 million tons under NFSA plus price support for pulses and oil-seeds.
The second legislation for a one time waiver of farmers’ debt all-over India will cost the exchequer Rs 200,000 crore plus – going by the magnitude of loan waiver promises being made in the states that have gone to polls in recent times.
Already, the center is struggling to find resources for the food subsidy bill under NFSA with pending dues of about Rs 200,000 crore to FCI forcing the latter to tap all possible sources including the NSSF [National Small Savings Fund] to continue operations. One shudders to think of a scenario whereby the government will be required to cough up an additional at least Rs 300,000 crore contingent upon passage of two laws that farmers insist on.
This will completely destabilize the budget and play havoc with government’s fiscal consolidation drive. Its ability to fund development works including investment in irrigation, rural roads, markets etc will be seriously undermined. This will affect farmers ability to increase production and sell leading to further drop in income. It will be a case of giving from one hand and taking away from the other.
Clearly, high MSP with legal backing is suicidal. The government should avoid treading this path. The genesis of low price realization by farmers lies in their being forced to sell the produce at notified APMCs [agriculture produce market committees]. These APMCs are cartelized and mostly controlled by powerful traders who have connections with politicians/bureaucrats. They pay less to farmers and rake in moolah by selling to consumers at high price.
Instead of using tax payers money to compensate farmers [that will only help traders continue with their loot], the problem has to be tackled at the source. The focus should be dismantling these cartels and invest heavily in establishing alternative platforms to enable them sell their produce. Removal of restrictions on exports and unencumbered foreign direct investment [FDI] in retail are other potent policy incentives that would help them realize better price.
Will Modi crack the whip?