India’s minimum support price for crops useless without procurement
An interesting story was published recently by The Hindu Business Line on worries in India’s poultry sector. The story highlighted two issues – one the threat of cheap chicken-leg imports from the United States; and the other worry was the Indian government’s decision to increase the minimum support price (MSP) of maize (corn) by 19.3% to 1,700 rupees (US$24.80) per 100 kilograms.
Corn is a poultry feed and 70% of its production in India is consumed by the poultry-and-livestock sector. The increase in the MSP for corn would mean a higher cost of production for this sector. This has created panic among the sector as to how will it compete with the cheaper chicken legs being imported from the United States.
Every year, the government of India declares the MSP for 23 agricultural crops. It ensures that the farmer gets a minimum price for what he produces against any sharp fall in market prices. It recently declared the support price for 14 agricultural crops that are sown during the summer season. But the trouble is that the government has very little influence over prices of most of the crops it announces this price for.
For example, the MSP for corn announced by the government last year was 1,425.02 rupees. But the wholesale modal price for most of the procurement season was around 1,200 rupees, which was 12-13% lower than the support price.
The government’s ability to influence the wholesale price of most of the crops it announces for is rather limited, because it procures limited amounts of these crops. Over the years, the two crops that the government has procured the most are paddy rice and wheat.
In the case of corn in 2017-18, the total procurement stood at 40,428 metric tons. The total production of corn during that financial year is estimated to be 26.88 million tons. So the government procurement stood at 0.15% of the total production.
Similarly, in the case of pearl millet (Bajra), the total procurement of the crop by the government in 2017-18 stood at 35,136 metric tons against the total production of 9.08 million tons. This means that the government procured around 0.4% of the total production.
The minimum support price for pearl millet this year has been increased by close to 37% to 1,950 rupees per 100kg.
Experts are of the view that this has been done because of the upcoming state assembly elections in Rajasthan, which are scheduled for early next year. Rajasthan accounts for more than half of the pearl millet produced in the country. By increasing the MSP for this by 37%, the government is hoping that the farmers in Rajasthan will get a good price for their produce.
But given that there is hardly any procurement from the government, the chances that the farmers will actually be paid according to the announced price or higher are slim. It doesn’t make sense for the government to procure these crops simply because they are not distributed through the public distribution system.
The document titled ‘The Price Policy for Kharif Crops: The Marketing Season for 2017-18″ points out that the disposal of these crops “does not take place through [the] public distribution system unlike wheat and paddy, it leads to high expenses because of costs involved in storage, handling, interest on capital and losses in disposal of the procured stock.”
The government of India distributes subsidized rice and wheat through half a million ration shops that make up for the public distribution system. And so the two crops that the government procures the most are paddy rice and wheat.
Among the crops grown during the summer season, paddy gets procured the most. In 2017-18, the total amount of rice procured by the government in the season stood at 38.1 million metric tons. Against this, the production of rice stood at 96.39 million tons. Hence nearly 40% of the rice produced in the country during the summer season is procured by the government.
Therefore, in the case of paddy and wheat, the government has some ability to influence price. But even here, the procurement is concentrated in certain states and is not spread across the length and breadth of the country. This in essence leads to farmers having to sell rice at a price lower than the MSP in some areas.
The poultry sector in India has worked itself up needlessly. The government to date has bought very little of the corn that is produced. Of course, things can change this time around. But building any procurement system takes time, and can’t happen in a matter of a few months. Also, procuring two crops, rice and wheat, is much different from trying to procure 23 crops for which the minimum prices are announced.
First, it would cost a lot of money. Second, unlike rice and wheat, which are subject to the public distribution system to meet the requirements of the Food Security Act, what will the government do with all the other crops it acquires? Third, it has been seen that minimum support price with procurement leads to excess production of crops. Fourth, excess production of crops lead to the government acquiring more rice and wheat than it requires to meet its commitments under the Food Security Act, as well as to maintain a strategic reserve.
In this scenario a cash-based payout to farmers who are unable to sell their produce at the minimum support price makes more sense than trying to procure all the crops for which the prices are announced.
As the document titled ‘The Price Policy for Kharif Crops: The Marketing Season for 2017-18” points out, “To ensure minimum support price to farmers, a system should be brought in place wherein difference between minimum support price and market price should be paid directly to farmer’s bank account.
“This will minimize government intervention in procurement of crops and will also result in curbing loss of food grains incurred in terms of non-availability of storage as farmers will be able to sell their produce directly to traders and get the difference from the government.”
The government seems to be working on this. The press release announcing the minimum support price states: “NITI Aayog, in consultation with central and state governments, will put in place a foolproof mechanism so that farmers will get adequate prices for their produce.” The NITI Aayog is a policy think-tank of the government of India that makes immense sense.