Excerpt: Why not give MSP prices to all farmers?

The people advancing this argument have absolutely no understanding of how markets work. Around 60-80% of foodgrain procurement in India currently happens through the private sector. Some pay the MSP prices but most do not. Forcing every private player to pay MSP will bankrupt them as the market doesn’t demand it. This will destroy even the existing supply chain by making them go out of business. And if they go out of business, every other food crop will also be impacted and then the demand will be for the government to extend MSP to all foodcrops. The logic being that if MSP can be forced on 26 crops, why not extend it to every agricultural produce in the country?

The end result will be a majority of foodgrains (60-80%) will not be purchased by private players and will be being stuck with farmers because nobody wants their produce. Punjab is the most unequal state in India with small and marginal farmers have the smallest land holdings. Each one of the small and marginal farmers in Punjab and other states will then come close to penury and that will force the Indian Government to buy all the foodgrains which the private sector will not buy.

Currently buying even 20-40% of the rice and wheat costs the Indian Government around 1.5 lakh crores. Buying another 60-80% could set the Government back by 7.5 lakh crores just for wheat and rice. Accepting MSP for 26 crops means that the Government will need to end up buying all the produce of these farmers, if the private sector does not buy. If MSP is extended across all crops in India, the government can then just shut down completely. This is something the mischievous media refuses to discuss and protesting farmers seem to ignore. Where will the Government get the additional 6 lakh crores? Should the Government spend all its time on saving agriculture (18% of its GDP) and ignore every other sector (the balance 82%)? Should they be procuring produce which nobody in external or internal markets wants to buy. Because the MSP prices are uncompetitively priced higher than markets, it can’t even be exported and will just rot in the granaries. Political interference in the laws of economic laws of demand and supply will only have devastating consequences.

One important reason for private companies not paying MSP is a structural issue which nobody, including farmers, wants to address. The catch is that unlike governments which absorb supply chain inefficiencies, the private sector has to pay an inordinate cost to store and transport foodgrains. There is negligible supply chain and storage infrastructure in India. Governments in the past have been ineffective in addressing these issues. They had unwisely sacrificed the long-term interests of farmers in favor of votebank subsidies like free power and increased MSP prices. Other than them being counterproductive, these subsidies go straight to the hands of the richest farmers. Why does less than 1% of India pay income tax? Why are the rich farmers who also get enormous subsidies, exempt from paying tax?

Sugarcane farmers already have a model where something akin to minimum MSP is expected from all procurers. Because of price guarantees, most farmers have stopped diversifying their crops and moved en-masse to making sugar for the mills. It has been a mess where the prices of sugarcane are well above international prices and extremely uncompetitive. Because Governments don’t have funds to pay farmers the exorbitant prices, farmers keep waiting two years and more to get paid. Much of the Maharashtra suicides derive from unpaid sugarcane dues. When asked to diversify to more remunerative crops, their response is either “Sugarcane is the crop of our forefathers and we are carrying forward the legacy. Why would we grow anything else?” or a misplaced sense of pride “A cane farmer has more respect than someone who grows vegetables.” Economic logic doesn’t seem to matter. Governments need to rethink why they would want to subsidize a crop which is overpriced in the world market and has no buyers. Why not just pay farmers directly for produce they don’t make?

Supply chain logistics can only be built by massive investments in storage, roads and transportation. It requires deep pockets to finance these enterprises. While sectors like the internet economy and agricultural supply chains need enormous resources, rich countries like the United States managed this by massive government investments in the beginning and later opening it to the private sector. But for poor countries like India which can’t afford the initial massive investments, either they sacrifice their short-term gain for the long-term benefits like what China did (a concept which most Indians don’t seem to appreciate or understand) or they lean towards corporates with deep pockets like Indian or MNC conglomerates.

Blind mistrust of corporates is dangerous. There are only 2 options for investments, Governments and the private sector. If governments have not delivered, it has to be the private sector. There are no further choices. While people seem to relish blaming the Ambani and Adani duo for corporate excess, they are among the few best in class Indian companies which have proven themselves over the years in energy and telecom. Reliance Jio created value where nothing existed. When nobody thought of investing in the Indian internet economy and when few Indians had access to the internet, today every tech company is tying up with Jio to enter India. It was impossible to think a couple of years back that Indians would lead most other countries in data usage. Once someone does the plumbing for infrastructure, only then can other players like the average entrepreneur enter the space and expand the pie.

Published by Vinod Aravindakshan

Engineer, Economist and Manager

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