Key reforms that can make guaranteed MSP possible for farmers

A composite plan for five years will certainly resolve farmer crisis, fetch rural prosperity and reduce migration to urban areas. Thus, it will be a win-win situation for all
Key reforms that can make guaranteed MSP possible for farmers
Key reforms that can make guaranteed MSP for farmers possible (Representational Image: Shutterstock)

The average income of farmers is miserably low while compared with other persons engaged in the industry and services. This is due to “low sale price” at farm-gate and the “surplus production” of foodgrains. In general, there is perennial distress among the farmers causing suicides and agitations. If the entire foodgrain is sold at minimum support price (MSP), the farmers’ distress can be resolved to a large extent.

Agro input subsidies reduce the production cost but its benefits are passed on to consumers and not to farmers in the true sense. “Kissan Samman Nidhi” could be an interim relief but not a permanent solution. A sustainable sale price of agro produce is the right choice. For which, MSP must be ensured to all farmers through appropriate policy. Moot question is; whether the ‘Guaranteed MSP’ is feasible considering the fiscal constraints? If not, how to resolve it? For perishable agricultural produce, a separate policy is needed which is not discussed here.

In FY-2020, under MSP, the Government had procured 23 eligible crops barely 26 per cent by value. This might be below 15 per cent of all crops. Even with such a low level of procurement, unsold stock with FCI and the states is about 32 million tonnes and 24 million tonnes respectively. The debt of FCI has also exceeded Rs. 4 lakh crores incurring huge interest and storage costs. Therefore, it is not feasible for the government to buy entire production in the present manner.

Unlike an industrial product, the production cycle of foodgrain is longer. It is produced 1-3 times in a year and consumed throughout the year. Hence, it is to be stored during crop arrival season and to be sold to the ultimate consumer in the elongated period. India must develop food processing industries and trade channels for sharing the procurement burden during crop arrival season. Market price during crop arrival is bound to be lower which may cause exploitation of farmers while purchasing by such private channels. A legal binding of MSP on trade channels alone, as demanded by farmers, is an incomplete solution in my opinion unless the problems of the trade channel are also resolved.

Considering the complexity, India needs an ‘out of box idea’. By which, the farmers will get MSP and the fiscal and debt burden on Government and FCI shall also reduce except during the initial years.

Reforms that can make guaranteed MSP possible for farmers

  • Food Corporation of India (FCI) must assist farmers with such sale transactions through auction. The floor price must be kept about 93-95 per cent of MSP. FCI should fix quality standards and provide testing facilities to avoid any arbitrary deduction by purchasers on the quality ground.
  • Unsold stock must be essentially stored by FCI and a ‘Goods receipt’ (GR) may be issued to farmer mentioning the quantity, quality and loan amount. The validity period of such GR may be 5-6 months. FCI must extend loan to farmer up to 90 per cent of stock value at MSP price. Same can be refinanced by the banks to FCI at SLR rate. In absence of such stocking facility, the farmer is compelled to sell its produce at distress price to trade channel. This is the key recommendation.
  • GR must be transferable and tradable in the open market, e-NAM and commodity exchange. For which, FCI must assist and charge nominal fee of 0.5 per cent of sale value. The interest and storage charges may be levied maximum 9 per cent per annum on the stock value which may be recovered from the ultimate buyer during delivery of goods. Balance money may be remitted to farmers. This will eliminate interest and storage cost of FCI.
  • In general, the price of foodgrain increases till the next crop arrives in mandis. Thus, farmers shall get better price after storage, as normally done by trade channels. With prior consent of farmers, FCI may also purchase stock at MSP as per needs of PDS scheme. For which, FCI don’t need separate buffer stock, as being done now. More so, the PDS subsidy must be immediately reimbursed to FCI. Thereby, the debt burden on FCI shall reduce.
  • In case, the stock is not sold by farmers within the validity period of GR, they shall lose selling rights and it shall be deemed sale to FCI at MSP. Immediately after the expiry of validity of GR, FCI shall remit balance money after adjusting debt, interest and storage charges.
  • With above arrangements, on an average, the farmers might get about 95 per cent of MSP. Hence, MSP may be increased by 5-7 per cent. After one or two years, there are bright chances for getting higher price to farmers. FCI shall also be benefited since; its debt burden and storage cost shall reduce. Rather, it might earn gross profit in future years.
  • For availing benefit by all farmers across the nation, FCI should increase network of mandis and storage capacity. It should also build marketing infrastructures. More so, it must disseminate market information to farmers.
  • Intermittently, the stock with FCI might increase due to excess production or poor market demand. In such a situation, FCI must quickly export directly or through trade channels. The government must encourage export and be liberal for giving predictable export incentives to compensate loss of FCI, trade channels and processing industries. By this, the debt of FCI shall reduce and the storage capacity shall be available for fresh arrival of crops. More so, trade channel shall also participate.
  • The fiscal burden due to such export incentives may be gradually compensated by cutting down the farm input subsidy which is in fact not retained with farmers but passed on to consumers.

Simultaneously, India must promote foodgrain processing industries near to FCI godowns. FCI should share logistic infrastructure with processing industries and trade channels for exports and onward marketing. A team spirit between FCI, the government, processing industries, traders, exporters and farmers will certainly deliver desired outcomes. States should also join this team.

Currently, India must provide such relief to farmers and save them from the prolonged sufferings. Gradually, the production cost of agro-produce must be reduced through investment in infrastructure and technology for protecting consumers. Farmers may also be pursued for crop diversion; that will reduce agro-imports and enhance income. India should also develop entrepreneurial skills of farmers. A composite plan for 5 years will certainly resolve farmer crisis and fetch rural prosperity and reduce urban migration. Thus, it will be a win-win situation for all.

(Views expressed in the article are author’s own. Currently, RP Gupta is the Non-Executive Director of Shiva Cement and Advisor to Shivom Minerals. In his 5-decade professional journey, he has been into cement manufacturing, iron ore and many other businesses. His first book ‘Turn Around India’ was released by Narendra Modi in April 2013.)

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