How to make MSP feasible?

How to make MSP feasible?
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How to make MSP feasible?

Highlights

India needs to think innovatively to provide guaranteed MSP

Successive governments have provided huge subsidies for agro inputs such as fertilisers, electricity, water etc. Income tax on agriculture is also exempted. Bank credits at cheaper rates are provided on a priority basis. At times, the loans are also waived. In addition, cash assistance is given through the 'PM Kissan Samman Nidhi' scheme.

In FY20, under the MSP (minimum support price), the government procured 23 eligible crops, barely 26 per cent by value. This might be below 15 per cent of all crops. Despite this, unsold stock with FCI is about 32 million tonnes and 24 million tonnes with States. Debt of FCI has also exceeded Rs 4 lakh crore incurring huge interest and storage cost. Hence, it is financially not feasible for the government to purchase entire food grain at MSP except for the PDS scheme, as is being done now.

Despite all such assistance, there is perennial distress among farmers causing suicides and agitations. The key impediments are 'low sale price of food grain' at farm gate due to surplus production and the exports are not so competitive every time except for a few years. Unlike industrial products, the production cycle of food grain is too long. But poor farmers don't have financial resources and storage capacity and wait for remunerative prices. A majority of food grains are sold at distress price which is much lower than MSP. Hence, farmers are demanding that; entire produce is sold at guaranteed MSP. Their demand is genuine.

Private trade channels shall not purchase at MSP during crop arrival season. They have to store the stock and incur cost of storage and interest. Considering past market trends and surplus production don't ensure profit unless; the exports are liberally permitted. More so, the exports are not so competitive, unless the export incentives are available. The cost of logistics, capital, energy and other basic inputs in India are too high in India compared to peer nations.

Considering the complexity, India needs an 'out of box scheme,' by which, the farmers will get MSP and the fiscal and debt burden on government and FCI shall reduce. More so, it should be a profitable proposition for the private channel. For this, FCI has to play a vital role and the government should incur capital expenditures in building storage and logistics infrastructures for FCI from budgetary resources without burdening FCI for the repayment of capital cost.

More so, the government should extend export incentives to FCI and private channels including processing industries. Fiscal burden due to export incentives shall be gradually compensated by cutting down the farm input subsidy which, in fact, is not retained with farmers but passed on to consumers.

FCI must assist farmers for selling food grains through auction to private channels under its supervision. The floor price must be kept at 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 stocks must be essentially stored by FCI and the cheap loan may be extended to farmers up to 90 per cent of stock value at MSP price. Same can be refinanced by Banks to FCI at SLR rate. In absence of such a stocking facility, the farmer is compelled to sell its produce at distress price to the trade channel. This is the key recommendation.

A 'Goods receipt' (GR) may be issued to farmers against stocks mentioning the quantity, quality and loan amount. The validity period of such GR may be 5-6 months. GR must be tradable in the open market, e-NAM and Commodity exchange. FCI must assist and charge a nominal fee of 0.5 per cent of sale value. Interest and storage charges may be levied at 9.0 per cent per annum on the stock value. That 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.

Generally, the price of food grain increases still the next crop arrives. Thus, farmers shall get better prices after availing storage facilities, as normally done by trade channels. With prior consent of farmers, FCI may also purchase stock at MSP as per the needs of PDS scheme. By this, FCI shall not need separate buffer stock, as is being done now. Thus, the debt burden on FCI shall substantially reduce.

If 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. After expiry of validity of GR, FCI shall remit balance money after adjusting debt, interest and storage charges. With above arrangements, the farmers might get about 95 per cent of MSP. Hence, in due course, MSP may be increased by 5-7 per cent. After stabilizing the system, there are fair chances for farmers getting higher prices. FCI shall also be benefited since; its debt burden and storage cost shall reduce. Rather, it might earn gross profit in future years from service fee and storage charges. However, FCI should increase storage capacity and build marketing infrastructures. More so, it must disseminate market information to farmers.

In this process, 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. Government must encourage export and be liberal in giving export incentives to compensate for the loss of FCI and trade channel and processing industries. By this, the debt of FCI shall reduce and the storage capacity shall be available for fresh arrival of crop. More so, trade channels shall also be motivated to participate.

Simultaneously, the government must promote food grain processing industries and trade channels near to FCI godown and share the logistic infrastructure for exports and onward marketing. A team spirit between FCI, government, processing industries, traders, exporters and farmers will certainly deliver the desired outcome. States should also join this team. Farmers may be also pursued for crop diversion; that will reduce agro-imports and enhance farmer's income. A composite plan will certainly resolve the crisis and fetch rural prosperity and reduce urban migration.

(The author is an economist)

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