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Subject: Agriculture

  • An MSP scheme to transform Indian agriculture

    Context

    The MSP must look especially into the requirements of farmers and the landless.

    Background of price stabilisation for food grain

    • The Essential Commodities Act in 1955 sought to counter price rise due to speculative private trading and then MSP in the 1960s.
    • A buffer stock policy was developed over time to involve different kinds of mechanisms such as:
      a) setting cost-based minimum procurement price, paying the difference between procurement price and market price.
      b) storing the procured surplus for sale through the Public Distribution System (PDS) at issue price, and market intervention to stabilise price when deemed necessary.
    • This task required interlinking procurement, storage and distribution with more centralised investment and control of each of these tasks.

    3 Purposes MSP could serve

    MSP could serve, in principle, three purposes:

    • Price stabilisation in the food grains market.
    • Income support to farmers, and
    • As a mechanism for coping with the indebtedness of farmers.

    Advantages of wide coverage

    • Fulfilling three objectives: In this way, the objectives of income support to farmers, price stabilization, food security, and inducing more climate-friendly cropping patterns can be combined to an extent.
    • Solution to debt problem: A real breakthrough in the recurring problem of agricultural debt can be made by the linking of selling of grains under MSP to the provision of bank credit particularly for small farmers.
    • The farmer can get a certificate selling grains at MSP which would be credit points proportional to the amount sold; this will entitle them to a bank loan as their right, and calibrate the fluctuations between good and bad harvest years by storing the certificates for later use.

    Issues with MSP in current form

    • Low accessibility and awareness of the MSP regime: A survey highlighted that 81% of the cultivators were aware of MSP fixed by the Government for different crops and out of them only 10% knew about MSP before the sowing season.
    • Arrears in payments: More than 50% of the farmers receive their payments of MSP after one week.
    • Poor marketing arrangements: Almost 67% of the farmers sell their produce at MSP rate through their own arrangement and 21% through brokers.
    • Partial coverage resulting in skewed cropping pattern: This partial MSP coverage skewed the cropping pattern against several coarse grains and millets particularly in rain-fed areas.

    Way forward

    • Flexible arrangement of MSP: Each crop within a band of maximum and a minimum price depending on harvest conditions i.e. higher price in a bad and lower price in a good harvest year in general will have its price set in the band.
    • High MSP for coarse grains: The price of some selected coarse grains can be fixed at the upper end of its band to encourage their production in rain-fed areas.

    Conclusion

    Greater coverage of all 23 crops under MSP is a way of improving both food security and income support to the poorest farmers in rain-fed regions.

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  • Agriculture finance in India

    Context

    While the overall budgetary allocation towards the agricultural sector has marginally increased by 4.4% in the Union Budget 2022-23, the rate of increase is lower than the current inflation rate of 5.5%-6%.

    Agricultural Finance in India – A brief history

    Phase 1 (1951-69):

    • Thrust on developing primary sector since 1st FYP in 1951.
    • National Credit Council in 1968 emphasized that commercial banks must increase financing to small scale industries and agriculture
    • Nationalization of banks in 1969 put thrust on the opening of rural/semi-urban bank branches

    Phase 2 (1970-1990)

    • The decade of 1970s marked the entry of commercial banks into agricultural credit with the Lead Bank Scheme and regulatory prescription of Priority Sector Lending (PSL).
    • Regional Rural Bank Act, 1976 enacted to specifically provide banking and credit facilities for agriculture and
      other rural sectors.
    • National Bank for Agriculture and Rural Development (NABARD) was established in 1982 to promote agricultural and rural development, particularly by financing SHGs and MFIs.
    • RBI introduced in 1989 service area approach (SAA) & Annual Credit Plan (ACP) system to increase outreach
      to rural areas.

    Phase 3 (1991-onwards)

    • Implementation of Narasimham Committee Report of 1991 to increase the operational efficiency of banks.
    • 1st major nationwide farm loan waiver in 1990.
    • Establishment of the Rural Infrastructure Development Fund (RIDF) with NABARD mainly meant for funding rural infrastructure projects.
    • NABARD started a pilot project SHG-Bank Linkage Programme in 1992.

    Mechanisms of Agriculture Credit in India

    • Priority Sector Lending: PSL was introduced to ensure that vulnerable sections of the society get access to credit and that there is an adequate flow of credit to employment-intensive sectors like agriculture and MSME.
    • Interest Subvention Scheme (ISS) was launched for short-term crop loans in 2006-07. 2% interest subvention is given to farmers, which is reimbursed to banks (through RBI and NABARD). Additionally, a 3% prompt repayment incentive (PRI) is provided for good credit discipline.
    • Kisan Credit Card (KCC) Scheme, introduced in 1998, aimed at providing adequate and timely credit with flexible and simplified procedures for agriculture-related and also consumption requirements of farmer households.
    • Self Help Group- Bank Linkage Programme (SHG-BLP) aimed at harnessing the flexibility of an informal system with the strength and affordability of a formal system. The SHG-BLP model accepted informal groups as clients of banks – both deposit and credit linkage & allowed collateral-free lending to groups.
    • Joint Liability Groups (JLG) Scheme was initiated by NABARD in 2006 to enhance credit flow to share croppers/tenant farmers who do not have land rights.

    Issues with India’s low spending in agriculture

    • The UN Food and Agriculture Organization (FAO) report for 2001 to 2019 shows that, globally, India is among the top 10 countries in terms of government spending in agriculture, constituting a share of around 7.3% of its total government expenditure.
    • However, India lags behind several low-income countries such as Malawi (18%), Mali (12.4%), Bhutan (12%), Nepal (8%), as well as upper-middle-income countries such as Guyana (10.3%) and China (9.6%).

    Low budgetary allocation

    a) Low allocation for important schemes

    • Drastic slashing of funds towards the allocation towards important schemes like Market Intervention Scheme and Price Support Scheme (MIS-PSS)- â‚č1,500 crores (62% less than the previous allocation of â‚č3,959.61 crores in the revised estimates (RE) of FY 2021-22).
    • Similarly, the Pradhan Mantri Annadata Aay SanraksHan Abhiyan (PM-AASHA) was allocated just â‚č1 crore for the year as against an expenditure of â‚č400 crores in 2021-22.

    b) Low Capital Investment

    • Allocation for the promotion of rural development was 5.59% in the previous budget which has been further reduced to 5.23% for the present financial year

    Other issues

    a) Institutional vis-Ă -vis Non-Institutional Agricultural Credit: Traditionally, rural agrarian credit needs were met primarily through money-lenders, which led to large-scale indebtedness.

    • According to National All India Rural Financial Inclusion Survey (NAFIS 2015), the share of non-institutional credit still persists at around 28%.
    • Unavailability of credit for consumption purposes and to tenant farmers, sharecroppers, and landless labourers, who are not able to offer collateral security, further pushes them towards non-institutional sources.

    b) Skewed agency share in institutional credit: Dependency on scheduled commercial banks in agricultural & allied credit is still large (~78-80% of the credit). Though co-operative institutions (~15%) and Regional Rural Banks (~5%) play a significant role in extending agricultural credit, their share is highly skewed geographically.
    c) Regional Disparity in Agricultural Credit: States falling under central, eastern, and northeastern regions are getting very low agri-credit as % of their agri-GDP.
    d) Poor deployment of agricultural credit to allied sectors (~6-7%) despite a share of 38-42% in the agricultural output indicates neglect of allied sectors by the banks.
    e) Issues with Priority Sector Lending (PSL): Though at the aggregate level banks have been able to achieve the overall PSL target of 40%, so far they have failed to achieve the agriculture target of 18% at the system-wide level. Moreover, ~60% of Small & Marginal Farmers (SMFs) have not been covered by SCBs.
    f) Interest Subvention Scheme (ISS) on short-term loans have skewed the distribution of agricultural credit in favor of production credit against crop-related investment credit, which is important for the long-term sustainability of the agriculture sector.
    g) Kisan Credit Card: As per Agricultural Census 2015-16, only 45% of the farmers possess operative KCCs. Agricultural households are unable to get credit for their consumption requirements and hence, they are compelled to go-to money lenders.
    h) Diversion of agriculture loans for non-agriculture purposes:     In many states like Tamil Nadu, Andhra Pradesh, Kerala, etc, agri-credit is far higher than their agri-GDP, indicating the possibility of diversion of
    credit for non-agricultural purposes. Diversion accentuates the problem of debt overhang, fuels a high level of indebtedness, and deteriorates credit culture in long run.

    Way forward

    a) Improve the Reach of Institutional Credit:

    • Complete the digitization process and update land records in a time-bound manner.
    • Reforming of land leasing framework by adopting policies like the Model Land Leasing Act proposed by NITI Aayog, which intends to make all lease agreements formal and enhance access to formal credit.
    • Establish a federal institution in agriculture on the lines of GST Council to enable consultation with states during formulation & implementation of reforms.

    b) Addressing regional disparity: PSL guidelines should be revisited for improving the credit off-take in central, eastern, and northeastern states.
    c) Increasing Credit Flow to Allied Activities: Set separate targets for loans towards allied activities under Ground Level Credit (GLC) & Priority Sector Lending (PSL) guidelines.
    d) Enhancing the sub-target of SMFs under PSL- Considering that the total operated area held by SMFs would amount to 51.85% by the year 2020-21, increase the share of agricultural credit under PSL to SMFs to 10% from the current 8%.
    e) Agricultural Loans against Gold as Collateral: Banks should develop an MIS to flag agricultural loans sanctioned against gold as collateral in CBS in order to segregate such loans for effective monitoring of end-use of funds.
    f) Utilizing Farmer Producer Organisations (FPOs): NABARD should promote women-oriented FPOs by identifying successful women SHGs. Government should expand the scope of its credit guarantee program through Small Farmers’ Agribusiness Consortium (SFAC).
    g) Database for Indian Agriculture sector: Develop a centralized database capturing details related to crops cultivated, cropping pattern, output, sown/irrigated area, the health of the soil, natural calamity, etc. Besides, farmer-wise details like identity, land records, loan availed, subsidy given, insurance and details of crop cultivated, etc. should also be captured.
    h) Convergence of National Highways development, Rural infrastructure, rural facilities, and increase the number of markets as recommended by the National Commission on Farmers. 

     

    Consider the question “What explains India’s low score on Agriculture Orientation Index which is the ratio between government spending towards the agricultural sector and the sector’s contribution to GDP? Suggest the way forward.”

    Conclusion

    The intensification in government spending towards the agricultural sector is the key to attaining the sustainable development goals of higher agricultural growth and farm income.

     

  • Opportunity for agri-reforms in Punjab

    Context

    It is no secret that Punjab, once the frontrunner of Indian agriculture, is struggling to retain its dynamism.

    Need to diversify

    • While Punjab ranked at the top of major Indian states in terms of per capita income during 1967-68 to 2002-03, it has slipped below the 13th position.
    • Punjab’s agricultural growth rate, at 5.7 per cent, was more than double the country’s average of 2.3 per cent during 1971-72 to 1985-86.
    • This has reversed between 2005 and 2019 with Punjab at 1.9 per cent and India at 3.7 per cent.
    • Agriculture least diversified state: With almost 85 per cent of the gross cropped area under wheat and rice, agriculture is least diversified in the state. 
    • Mandi transactions cost about 8.5 per cent of the MSP, the highest in the country, making Punjab wheat and rice less competitive.

    What explains low diversification in agriculture?

    • Policies: Guaranteed MSP for wheat and paddy, backed by assured procurement, free power and highly subsidised fertilisers, has disincentivised diversification.
    • Political economy: The political economy around wheat and rice is so intense that any effort to address its distortionary impact is met with fierce opposition by vested interest groups.

    How to recalibrate Punjab agriculture towards higher, sustainable growth?

    • Augment livestock and milk processing: While fruits and vegetables account for 7.4 per cent of the value of the output of agriculture and allied sectors, livestock accounts for 31.5 per cent and fisheries less than 1 per cent.
    • The state has the highest per capita availability of milk but it can process less than 20 per cent of it.
    •  Promoting mega parks for value addition in fruits and vegetables, milk, and other livestock products through medium and small enterprises will strengthen its competitiveness.
    • Strengthen market for seed potato: It is also a significant player in seed potato and with the right package of practices, traceability systems, and infrastructure, the market for Punjab seed potato can be strengthened.
    • Scaling up alternative marketing channel: Alternative marketing channels for fruits and vegetables such as direct marketing, contract farming, and exports have been in place but these models need to be scaled up with the right ecosystem.
    • Shift to demand-driven agriculture: Punjab needs to switch from supply-driven agriculture to demand-driven agriculture.
    • The demand for fisheries, poultry, dairy, and fruits and vegetables is increasing way faster than the demand for wheat and rice.
    • Rationalise mandi charges:  Rationalising mandi charges to not more than 3 per cent will attract private sector investments in building efficient value chains.
    • Rationalise subsidies: Time-bound incentives in the form of freight subsidies for exporters of high-value agri-produce, tax exemptions for the processing of perishable commodities for value chain players would be more rational than the overloaded subsidies of urea and free power.
    • Use technology and start-up revolution: Punjab should leverage the start-up revolution that is unfolding in India, and use technology to ensure optimal utilisation of resources, expand markets, and augment farmers’ income.
    • Geo-tagging of farms can address concerns related to long-term leasing of land that is critical for large-scale investments and enable vibrant agricultural land markets.
    • Innovations in supply chain management, be it automated grain silos or state-of-art herd management will not only optimise the use of resources but also bring in traceability of farms and animals, early monitoring and prevention of disease outbreaks, and contain value chain losses.

    How to manage financial resources?

    • Rationalise urea subsidy: It should rationalise its fertiliser subsidy regime by moving towards cash transfers on a per hectare basis and free up fertiliser prices.
    • Include urea in nutrient-based subsidy scheme: If that’s not possible, then urea should be included in the nutrient-based subsidy scheme.
    • Bring soluble fertiliser under subsidy: Bring soluble fertilisers under subsidy, which will enhance fertiliser use efficiency through fertigation.
    • This will also help reap environmental gains.
    • Rationalise food subsidy: Food subsidy can also be rationalised through direct cash transfers replacing PDS, as Punjab is a grain surplus state.

    Conclusion

    Both environmental and financial sustainability concerns related to business-as-usual farming in Punjab call for a rebooting strategy.

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  • MSP is necessary to make farming viable

    Context

    There has been debate on the issue of MSP with some arguing against it while some favouring it.

    The issues with MSP

    • The broad strands of argument against MSP are:
    • MSP hinders the price discovery: Providing MSP does not allow the market to discover the prices; if market cleared prices are less than MSP, then the only buyer would be the government; this would render the government bankrupt.
    • FPO as a mechanism to deal with markets: If markets have any distortions, the way to negotiate it is through Farmer Producer Organisations (FPOs) — as demonstrated by Amul.
    • Provide income support through DBT: A better way to address the possible income gap is to give an income support-based direct benefit transfer (DBT).

    Why MSP is necessary?

    1] Barriers in agri-markets

    • Through tariffs and other measures, we have built a national barrier on markets, where gates are opened on the basis of strategic intent.
    • If we were to open our borders for free movement of grains from elsewhere, we may even argue for unlocking agricultural land for more lucrative purposes without worrying about food self-sufficiency, buffer stocking and domestic food safety.
    • We may have to accept a national food safety for at least the essential foodgrains and pulses.

    2] Role of MSP as price signalling and why it needs to be given as legal guarantee

    • Disproportionate risk: If we were to look at farming, we realise that this exposes itself to disproportionate risks. 
    •  First, there is no stop-loss mechanism after sowing the seed, except for destroying the crop for the season.
    • This enterprise not only has the usual business risks but also has the enhanced risk of the force majeure elements that destroy the enterprise — a sudden hail storm, drought, unseasonal showers, a pest attack, a locust attack — there are too many things that the farmer cannot control.
    • Therefore, an MSP provides a powerful signal to the farmer to exercise the choice of sowing a particular crop because the farmer can back-calculate the expected margin.
    •  If MSP is a signal that helps the farmer to choose a crop, then it must remain a choice at the harvest time as well.
    • The significance of MSP is only when the markets do not clear the price.
    • In such a situation, the farmer gets a return less than the MSP and by this argument we are escorting the farm fraternity towards bankruptcy.
    • A legal guarantee is, therefore, needed.
    • The argument that the state will have to procure all the floating stock in the market and may become bankrupt is fallacious.
    • The intervention of the state in the markets usually covers information asymmetry, arbitrage and cools the markets when they get overheated.

    3] Why not opt for income support instead of MSP?

    •  Income support does not address the issue of viability of the farming operations.
    • There is no doubt that we need to make farming viable.
    •  It is important to address the prices of each crop as a strategic signalling mechanism: For crops that would be encouraged and those that would be discouraged.

    4] Issues with drawing parallels with AMUL

    •  While the Amul model recognised the inherent power of markets, it took about five decades to make the system competitive — the investments were made in breed improvement, free veterinary services, better cattle feed, capital subsidy for processing plants, and return-free capital as investments.
    • The nature of subsidies was smart and innovative.
    • Dairying was the last bit to be liberalised, and it enjoyed protection even when we opened up in 1991.

    Way forward

    • Modernise the markets: We need to modernise the markets and storage and processing facilities.
    • There is no point in conflating modernisation with liberalisation.
    • Investment: If we need to take Indian agriculture on the path of Amul, we need to start making those investments now.

    Consider the question “What are the objectives of providing MSP? How legal basis to MSP could help in making agriculture viable in India?”

    Conclusion

    Let us use the MSP framework smartly on diversified crops, on a decentralised basis while we develop the markets. A legal guarantee will only assure the farmers that they will not be bankrupted.

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  • What is Samba Cultivation?

    Around four lakh more acres have been brought under the Crop Insurance Scheme for the Samba Cultivation season of 2021-22 in Tamil Nadu.

    What is Samba Cultivation?

    • It is a Tamil name for paddy cultivation season.
    • Other paddy seasons in Tamil Nadu include:
    1. Kuruvai: June-July
    2. Samba: August
    3. Late Samba / Thaladi: September- October
    4. Navarai: December- January

    Back2Basics: Major crop seasons

    (1) Kharif Crop

    • Kharif crops, monsoon crops, or autumn crops are cultivated and harvested in the monsoon season.
    • The farmers sow seeds at the beginning of the monsoon season and harvest them at the end of the season. i.e., between September and October.
    • Kharif crops need a lot of water and hot weather for proper growth.
    • Examples: Rice, Maize, Millet, Soybean, Arhar, Cotton. etc.

    (2) Rabi Crop

    • Rabi means spring in Arabic. Crops grown in the winter season [October to December] and harvested in the spring season [Aril-May] are called Rabi crops.
    • These crops require a warm climate for germination and maturation of seeds and need a cold environment for their growth.
    • Rain in winter spoils the Rabi crop but is good for the Kharif crop.
    • Examples: Wheat, Gram, Barley, Peas, Oats, Chickpea, Linseed, Mustard, etc.

    (3) Zaid Crop

    • Zaid crops are grown between Kharif and Rabi Seasons, i.e., between March to June.
    • They require warm, dry weather as a vital growth period and longer day length for flowering.
    • Zaid crop is significant for farmers as it gives fast cash to the farmers and is also known as gap-filler between two chief crops, Kharif and Rabi.
    • Examples: Cucumber, Pumpkin, Bitter gourd, Watermelon, Muskmelon, Sugarcane, Groundnut, Pulses, etc.

     

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  • Rythu Bandhu: Telangana DBT scheme for farmers’ assistance

    The total funds disbursed under Rythu Bandhu, Telangana government’s direct benefit transfer scheme for farmers, will soon touch Rs 50,000 crore in the coming days.

    What is Rythu Bandhu?

    • Rythu Bandhu is a scheme under which the state government extends financial support to land-owning farmers at the beginning of the crop season through direct benefit transfer.
    • The scheme aims to take care of the initial investment needs and do not fall into a debt trap.
    • This in turn instills confidence in farmers, enhances productivity and income, and breaks the cycle of rural indebtedness.

    DBT under the Scheme

    • Each farmer gets Rs 5,000 per acre per crop season without any ceiling on the number of acres held.
    • So, a farmer who owns two acres of land would receive Rs 20,000 a year, whereas a farmer who owns 10 acres would receive Rs 1 lakh a year from the government.
    • The grant helps them cover the expenses on input requirements such as seeds, fertilizers, pesticides, and labour.

    How much does it cost the state exchequer?

    • Since the Kharif season of 2018, the state government has been crediting Rythu Bandhu assistance to farmers.
    • As of date, it has credited Rs 43,036.64 crore into the bank accounts of beneficiaries.
    • This season, the state government will disburse another Rs 7638.99 crore, taking the total sum disbursed so far to over Rs 50,000 crore.

    Comparing with the PM-KISAN scheme

    • The state government has often said that the Centre’s PM-KISAN (Pradhan Mantri Kisan Samman Nidhi) scheme is a “copy” of Rythu Bandhu.
    • Under PM-KISAN, a land-holding family receives an income support of 6,000 per year in three equal installments.
    • Rythu Bandhu is based on anticipated input expenditure for each acre of land and there is no restriction on the number of acres owned by a farmer.
    • PM-KISAN only provides support to the family and not to the farm units.

    Criticisms of the Rythu Bandhu Scheme

    • The scheme does not cover the landless or tenant farmers.
    • Farmer bodies have been demanding that the state government should extend the agriculture assistance to tenant farmers as well.
    • They have pointed out that those who work on lands taken on lease from landowners also need government assistance at the beginning of a crop season.
    • It is difficult to bring tenant farmers under the ambit of the scheme because of the informal nature of the agreements they enter into.

     

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  • [pib] Seed Village Programme (Beej Gram Yojana)

    The govt is implementing Seed Village Programme (Beej Gram Yojana) since 2014-15 to upgrade the quality of farmers’ saved seeds.

    What do you mean by Seed Village?

    • It is a village, wherein a trained group of farmers are involved in the production of seeds of various crops and cater to their needs themselves.

    Seed Village Programme

    • This program aims at upgrading the quality of farm-saved seeds.
    • Under this, financial assistance is available for up to one acre per farmer for distribution of foundation/certified seeds at:
    1. 50% of seed cost for cereal crops
    2. 60% for pulses, oilseeds, fodder, and green manure crops

    Objectives of the program

    • Increasing the seed production
    • Increasing the seed replacement rate
    • Organizing seed production in cluster (or) compact area replacing existing local varieties with new high yielding varieties
    • Self-sufficiency and self-reliance of the village

    Implementation

    The present program of seed village scheme is having two phases:

    • Seed production of different crops: The area which is suitable for raising a particular crop will be selected, and raised with a single variety of a kind.
    • Establishing seed processing unit: If the seeds are not processed and handled properly, all the past efforts in production may be lost. Thus seed processing and packaging is a very important aspect of seed production.

    Benefits offered

    • Seed is available at the doorsteps of farms at an appropriate time.
    • Seeds are available at affordable costs even lesser than the market price.
    • It has increased the confidence among the farmers about the quality because of known sources of production.
    • It facilitates the fast spread of new cultivars of different kinds.

    Back2Basics: Seed Replacement Rate

    • It is the percentage of area sown out of the total area of the crop planted in the season by using certified/quality seeds other than the farm-saved seed.
    • In simple terms, it is a measure of the cropped area covered with quality seed.

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  • MSP for all crops is fiscally unfeasible

    Context

    Many political parties are demanding to make the minimum support prices (MSP) a legal instrument.

    Background of MSP

    • MSP regime had its genesis in 1965 when India was hugely short of basic staples and living in a “ship-to-mouth” situation.
    • Indicative price: It was an indicative price (not a legal price) and procurement of rice and wheat was done to support farmers when they were adopting new seeds (HYV technology) and domestic procurement was to feed the PDS.
    • The government declares MSP for 23 crops: Seven cereals (paddy, wheat, maize, bajra, sorghum, ragi and barley), five pulses (tur, moong, chana, urad and masur), seven oilseeds (soybean, groundnut, rapeseed-mustard, sesamum, safflower, sunflower and nigerseed) and four commercial crops (sugarcane, cotton, jute and copra).

    Need to rethink procurement policy

    • But now with granaries overflowing with rice and wheat, there is a need to rethink and redesign the procurement policy.
    • In the crop year 2020-21, about 60 million metric tonnes (MMTs) of rice and 43 MMTs of wheat were procured by the Food Corporation of India (FCI) and NAFED procured about 0.66 MMTs of pulses.

    The increasing cost of PDS

    • The main procurement by the government happens largely for rice and wheat to feed the public distribution system (PDS).
    • The PDS issue prices of rice and wheat are subsidised by more than 90 per cent of their economic cost to the government.
    • In 2020-21, the food subsidy bill was almost 30 per cent of the net tax revenue of the central government, reflecting clearly a huge consumer-bias in the system.
    • Way forward: Unless this PDS is reformed either by restricting this to say the bottom 30 per cent of the population, or raising the issue prices to say half the economic cost of rice and wheat, giving a better deal to farmers is likely to blow up the fiscal position of the central government.

    The cost of legal MSP

    • Assuming that only 10 per cent of the production of remaining crops (excluding sugarcane) is procured, it will cost the government about Rs 5.4 lakh crore annually to procure these other MSP crops.
    • This cost is estimated on the basis of economic costs of operation that are usually about 30 per cent higher than the MSP (in case of rice and wheat it is 40 per cent).
    • But it appears that despite this, market prices may stay below MSP, especially during the harvest time.
    • It also raises the question why only these MSP crops, why not other agri-produce, say milk, the value of which is more than the value of rice, wheat and sugarcane combined.

    Way forward

    • PDP: One may use price deficiency payments (PDP), implying that the government pays to farmers the gap between the market price and MSP, whenever market prices are below MSP.
    • Income support instead of price support: It may be better to use an income policy on a per hectare basis to directly transfer money into farmers’ accounts without distorting markets through higher MSPs or PDPs.

    Consider the question “What are the challenges in providing the legal backing to the Minimum Support Price to the agriculture produce? Suggest the way forward.”

    Conclusion

    There is no easy substitute to “getting the markets right”. Government need to apply an innovative approach to solve the conundrum of the MSP.

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  • Tackling agricultural reforms after farm laws repeal

    Context

    In the run-up to the repeal of the three farm laws, the potential cost of MSP to the taxpayers became a matter of debate.

    Issue of MSP

    • Large variation: Experts and agricultural economists quoted numbers about the cost of MPS.
    • There is a large variation in the quoted numbers.
    • The enormity of the variance in estimates is astounding.
    • No consensus on the number of beneficiaries of MSP: There is also a dissonance between the NSSO data and the administrative data on the number of farmers who enjoy MSP.
    • No consensus on a formula to calculate MSP: Further, there is no consensus on the formulae for the calculation of MSP.

    Suggestions on land reforms

    [1] Reduce high domestic prices

    • That India is an agri-surplus country.
    • That domestic prices of agri-commodities are often higher than in the international market and therefore, there is a need to bring them down.
    • How to achieve cost reduction: Cost reduction can happen either by creating efficiencies by plugging leakages or, by cost-cutting — including reducing farmers’ margins.
    • In the recently-reached understanding with the farmers, the government has agreed to constitute a committee on MSP.
    • Hopefully, a formula can be arrived at by which costs of domestic agricultural produce can be reduced while ensuring a “remunerative price” for the farmers.

    [2] Protecting landholdings

    • There is also a need to protect landholdings.
    • Farmers’ fears in this regard are not exaggerated.
    • Under the erstwhile laws, orders of payment made by an SDM/Collector could be recovered as “arrears of land revenue”.
    • While agricultural lands were protected from such recovery, non-agricultural (immovable and movable) assets appeared to be fair game.
    • Further, circumstances such as sustenance and payment of debts could force a farmer to sell their agricultural landholdings.
    • Large-scale loss of landholdings could lead to their consolidation in the hands of a few.
    • This could have the impact of turning the clock back, reminiscent of the Zamindari system.

    [3] Need to reconsider the dispute resolution mechanism

    • The government should also reconsider the dispute resolution mechanism provided in the erstwhile laws.
    • In an MSP driven regime, the government is likely to be a party in any potential dispute.
    • Conflict of interest: There will be a direct conflict of interest since the SDM/Collector is an arm of the government.
    • Land records are within the jurisdiction of the patwari and tehsildar, who report to the SDM/Collector.
    • Fast track courts: It would be advisable to think in terms of fast-track courts, and remove the provision of recovery through arrears of land revenue.
    • It would also be advisable to have only one dispute resolution mechanism for all farm laws.

    [4] Avoid over-corporatisation without the creation of the requisite efficiencies

    • We should not ask our farmers to brave corporatisation without levelling the playing field and enough jobs in the non-agricultural sector.
    • Over-corporatisation without the creation of the requisite efficiencies could lead us to become heavily import-dependent, killing the benefits of the Green Revolution.

    Conclusion

    Perfunctory reforms and those that don’t work for all constituents — corporates as well as farmers — could have long-term deleterious effects for not only the agricultural sector, but the economy as a whole.

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  • The WTO’s challenge to MSP

    Context

    Amid the demand for legal backing to MSP, the question remains about whether India can provide a legal guarantee violating its international law obligations enshrined in the Agreement on Agriculture (AoA) of the World Trade Organization (WTO)?

    Classification of subsidies under AoA: Trade distorting and non-trade distorting

    • The objective of AoA: One of the central objectives of the AoA is to cut trade-distorting domestic support.
    • Three categories: In this regard, the domestic subsidies are divided into three categories: ‘green box’, ‘blue box’ and ‘amber box’ measures.
    • Non-trade distorting: ‘Green box’ subsidies (like income support to farmers de-coupled from production) and ‘blue box’ subsidies (like direct payments under production limiting programmes subject to certain conditions) are considered non-trade distorting.
    • Countries can provide unlimited subsidies under these two categories.
    • Trade-distorting subsidies: Price support provided in the form of procurement of crops at MSP is classified as a trade-distorting subsidy and falls under the ‘amber box’ measures, which are subject to certain limits.

    So, how do countries measure ‘amber box’ support?

    • Compute AMS: To measure ‘amber box’ support, WTO member countries are required to compute Aggregate Measurement of Support (AMS).
    • AMS is the total of product-specific support (price support to a particular crop) and non-product-specific support (fertilizer subsidy).

    Understanding the  de minimis limit

    • Under Article 6.4(b) of the AoA, developing countries such as India are allowed to provide a de minimis level of product and non-product domestic subsidy.
    • This de minimis limit is capped at 10% of the total value of production of the product, in case of a product-specific subsidy; and at 10% of the total value of a country’s agricultural production, in case of non-product subsidy.
    • Subsidies breaching the de minimis cap are trade-distorting.

    Possibility of India overshooting the de minimis limit

    • Relation between MSP and AMS: The procurement at MSP, after comparing it with the fixed external reference price (ERP) — an average price based on the base years 1986-88 — has to be included in AMS.
    • Widening gap between ERP and MSP: Since the fixed ERP has not been revised in the last several decades at the WTO, the difference between the MSP and fixed ERP has widened enormously due to inflation.
    • According to the Centre for WTO Studies, India’s ERP for rice, in 1986-88, was $262.51/tonne and the MSP was less than this.
    • However, India’s applied administered price for rice in 2015-16 stood at $323.06/tonne, much more than the 1986-88 ERP.
    • Procuring all the 23 crops at MSP, as against the current practice of procuring largely rice and wheat, will result in India breaching the de minimis limit making it vulnerable to a legal challenge at the WTO.
    • Even if the Government does not procure directly but mandates private parties to acquire at a price determined by the Government, as it happens in the case of sugarcane, the de minimis limit of 10% applies.

    Way forward

    • Peace clause: Although a permanent solution is nowhere in sight, the countries have agreed to a peace clause.
    • The peace clause forbids bringing legal challenges against price support-based procurement for food security purposes even if it breaches the limit on domestic support.
    • The peace clause is applicable only for programmes that were existing as of the date of the decision and are consistent with other requirements.
    • India’s procurement for rice and wheat, even if it violates the de minimis limit, will enjoy legal immunity.
    • However, India will not be able to employ the peace clause to defend procuring those crops that are not part of the food security programme (such as cotton, groundnut, sunflower seed).
    • Move from MSP to income-based support: Arguably, India can move away from price-based support in the form of MSP to income-based support, which will not be trade-distorting under the AoA provided the income support is not linked to production.
    • Supplement price-based support with income-based support: Alternatively, one can supplement price-based support (keeping the de minimis limit in mind) with an income-based support policy.

    Conclusion

    The Government needs to engage with the farmers and create an affable environment to convince them of other effective policy interventions, beyond MSP, that are fiscally prudent and WTO compatible.

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