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  • Can government make MSP=SMP? MG Chandrakanth
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    Prof MG Chandrakanth did doctoral studies in Agricultural Economics from the University of Agricultural Sciences, Bangalore a

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    Make the Minimum Support Price (MSP) equal to Statutory Minimum Price (SMP) is the major demand of all farmers, farmer leaders including those supporting their demands. Is this possible? If MSP=SMP, then no buyer can purchase from farmers below MSP and if it happens, can be penalized legally. While this demand from farmers seems to be legitimate, the implications on consumers is also crucial. If buyers cannot buy at SMP, they cannot buy below SMP and farmers may have their produce unsold, which leads to another type of chaos. Therefore, coin MSP can be SMP, but with caveats. There is a need to fix the quotas to be procured at MSP=SMP only for those commodities which are essential and critical which Government supplies at Public Distribution System (PDS) under the National Food Security Mission (NFSM) and/or other similar commitments.

    Government for example, can announce that it will procure say upto 10 percent of production of Rice, Wheat, a millet and a pulse crop equal to the obligation under NFSM from every State. The quantity to be procured cannot be the entire quantity of production of any crop because this precisely leads to excessive market interference and market distortion.

    Dr Varghese Kurian’s classic innovation in milk through AMUL which lead to National Dairy Development Board offers an ideal. Accordingly, in milk, cooperative sector procures around 20% of milk produced while the remaining 80% is by private sector keeping milk prices buoyant. Therefore, the capacities of the Government to store, process, distribute and serve needs to be considered on the one hand and at the same time not to curb private initiatives on the other.

    Thus, excessive interference with market should be avoided by any Government, as it leads to market distortion. Market distortion is interference with self-correction mechanism of markets. What is self correction? When Demand exceeds supply of any commodity, price rises till the point Demand = Supply and market clears itself. Similarly, when Supply exceeds Demand, the price falls till the point Supply = Demand and market clears itself. And this market process should be facilitated and not interfered. When the Government interferes with MSP beyond a certain level, this self-clearing mechanism is interfered and it leads to excess production, as it has already happened in the case of rice, wheat in Punjab. Similar experience in EU lead to mountains of butter and lakes of milk!

    In addition, making MSP=SMP will make farmers to demand the facility for all crops, list being endless and becomes a very sensitive issue, as farmers cannot be prevented from seeking the facility. Do we want market forces to signal abundance or scarcity for farmers and consumers, or do we want administrative action to do this? Where are the resources with the Government, with more than 50% of vacancies both at Central and at State levels, paucity of procuring centres, man power, vehicles, storage space, processing facility, logistics? in order to procure rice, wheat, tur, millet for 50% of urban population (20 crores) and 75% of rural population (68 crores) the additional cost of 30% of MSP is already incurred. Thus, if Government is procuring paddy at Rs 1850 per quintal, it is incurring Rs. 555 per quintal towards logistics, storage distribution and so on, again has to be borne by tax payers. The Food Corporation of India is already borrowing around Rs. 2 lakh crores towards meeting obligations and in addition experiencing food wastage in godowns.

    Thus, the need to limit procurement to at the most 10% of the output of rice, wheat, tur, millet of any State, and limit its MSP= SMP only to this quantity, and fix it across States. While this policy benefits all States, Punjab and Haryana may not be happy as 100% of their rice, 80% of wheat is procured, while only 1% of rice produced in Karnataka is procured. What has been our experience in Sugarcane where MSP=SMP? In Sugar MSP is called FRP (Fair remunerative price), and thus no Sugar mill can buy below FRP. Demand for sugarcane is derived from demand for sugar, referred as “derived demand”. Sugar demand in India is 19 kgs per capita per year while global demand is 23 kgs. Even then, India being global diabetic capital! About Rs 16,000 crores are yet to be paid to farmers for sugarcane purchased previously, of which Rs 11,000 crores is due in UP itself. Global sugar consumption is 185 million tonnes growing at around 2% per year, India’s population growth is at around 1 %. With a FRP at Rs. 2850 per tonne for a sugar recovery of 10% no sugar factory can afford to buy at this price from farmers, since there is no corresponding demand for sugar. There is glut in sugar production to the tune of around 6 million tonnes. If India’s per capita consumption rises to the global average of 23kgs per year, then domestic demand will climb by 5.2 million tons a year and this may help. So, shall we all begin consuming more sugar? Do we advise consumers to increase sugar consumption on the one hand and advise farmers to limit their sugarcane on the other? Ultimately market forces of demand and supply cannot be discounted.

    Another solution is price deficiency payment scheme of MP. But, if farmers and traders collude which is not unlikely, trader can issue receipt even without buying, and claim the difference between SMP and market price and then share this difference with farmers and therefore Price Deficiency Payment scheme did not take off. Certainly, the truth is not popular. Farmers, consumers, policy makers, farm leaders, all the stakeholders for whom agriculture is crucial need to appreciate these issues.

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