Farm anxiety: An MSP law is neither unthinkable nor a magic bullet

Imagine if stock market investors agitate for regulation that imposes a minimum for stock prices. It is not as absurd as it sounds, and indeed many governments, even in rich market economies, have intervened to stop share prices from falling. If not a price floor, there is instead a ban on short selling, or intervention by state-owned agencies to prop up demand. This happened as recently as 2015, and later during the turmoil caused by the pandemic. Nobody calls this a “minimum price support” for stock prices, and it is justified for the sake of controlling volatility, or preventing a systemic crash that can spill over into a full-blown economic crisis. There have been minimum price support regimes for other sectors too, such as for telecom services to prevent a race to the bottom or predatory pricing.

The situation for minimum price support for crops is totally different, and has much stronger social, economic and political justification. In the absence of universal and adequate social security, or a universal basic income, the minimum support price (MSP) is a proxy for protecting the farmer, the seller of crops, just as the employment “guarantee” scheme is a proxy for formal unemployment insurance to rural folk. Since half of India’s population depends directly or indirectly on agriculture, and since much of India’s poverty is still confined to agriculture and in rural areas, this intervention is justifiably reasonable. Whether it has benefited farmers or made their income more secure is a matter for empirical research. As such, a reliable market mechanism to buy crop insurance does not yet exist. Forward markets and commodity derivatives are still nascent in India, and out of reach for most farmers.

The high-decibel debate on whether MSPs should be made into a legal guarantee and the fear mongering about fiscal bankruptcy has become a political hot potato, and is obfuscating the real issues.

First, even though MSPs apply to 23 crops, in practice it is applicable only to wheat and rice, and occasionally in smaller measure to pulses and soya. There is state-level support for sugarcane, and states like Maharashtra tried out monopoly procurement of cotton, but that is not relevant to the present discussion. Even the MSP regime as applied to wheat and rice works only in a few states and not for all farmers. Hence, a legal guarantee would spread it to all crops across India.

Second, by definition, the MSP is operative only when market prices fall below it. Hence, it is fair to say that roughly half the time, it is not even a binding constraint. The MSP law will impose a cost on the exchequer only when market prices fall below the floor.

Third, even though the law provides price support, it is often wrongly interpreted to mean quantity support. The government is not obliged to buy full quantities. It buys only the quantity offered, at the minimum assured prices. If prices move above MSPs, there is nothing to be done. Market dynamics ensure that whenever the government intervenes, prices will start moving up much before the full procurement quota is exhausted. Government procurement operates through mandis, outside the market mechanism. This is an option for the farmer, and used only when prices dip, or if the farmer fears getting cheated or bullied outside.

Fourth, the operative word here is ‘option.’ An MSP law will simply provide an option to the farmer. It is exercised only when needed. The true cost of providing this ‘free’ option to the farmer would be a very small fraction of the total value of Indian crop production.

Fifth, and most importantly, providing a legal guarantee is not supposed to be subjected to conventional cost-benefit analysis. It was not done for the country’s guarantee of rural employment, nor for health insurance, or for other such social schemes.

The government procurement scheme and public distribution system (PDS), which is six decades old, tries to achieve three goals with one instrument. It is supposed to ensure food security through stocking in warehouses, price stability for consumers and adequate incomes for farmers. Since 2013, it has been almost wholly driven by the compulsion of the National Food Security Act (NFSA), which “guaranteed” almost two-thirds of India’s population wheat, rice and coarse cereal at highly subsidized prices. Recently, NFSA prices were reduced to zero and the national free food scheme that covers 810 million people was extended for five years. Note that this has nothing to do with income security or protection of farmers, the original rationale of MSPs for crops. Besides, the PDS has always had an urban bias, often to the detriment of farmers, who need to earn windfall gains whenever crop prices zoom up.

The demand of a legal guarantee for MSP must be assessed not on fiscal cost alone. It has a signalling effect and will mean that the government is committed to extend the regime to all geographies and crops in a de facto sense, as it was meant to be.

How much recourse will be taken to such a legal guarantee can be assessed from empirical data. In almost 20 years of the National Rural Employment Guarantee Act, how often have people had to go to court to enforce their rights? But this assurance of jobs has proven to be a valuable safety net, especially in times of drought, famine and a pandemic. A legally-backed MSP is a good political signal, but it is not a magic bullet that will unshackle India’s farmers from their many woes and unfreedoms.