Aunindyo Chakravarty
Senior economic analyst
DARBARI economists will tell you that the Minimum Sustenance Price (MSP) system makes a few wealthy farmers fat. Do not listen to their lies and half truths. Yes, it is true that only a lucky few manage to sell most of their products at the minimum prices set by the government. But the government-announced MSP acts as a signal price for all crop trade across the country.
Had the government been serious about increasing farm incomes, would have strengthened PEM-based acquisitions.
How does that happen? Although most states regrettably lack government-regulated APMC mandis, the few that have become have become hubs for most crops. Farmers themselves may not be able to access these mandis, but local grain traders can. Small farmers need cash almost immediately after harvest, so they sell their harvest to local grain traders. Traders collect the product from the entire area and store it, until the official purchasing process begins.
These traders have the necessary links to raise money to rent rebates and then transport large quantities of wheat, rice, legumes and oilseeds. They have the holding power that small farmers do not have. Once FCI starts buying, grain traders dump a portion of their shares in the MSP. This becomes a form of insurance for them, assuring them that they can afford the cost of financing, transportation, and storage and earn a decent margin, even if the open market collapses.
This also ensures that they can pay constant prices to the farmers they bought from. If grain traders were exposed to the fluctuations that always occur in agricultural markets around the world, small farmers would get even less. This is clear from the crops that do not have official supplies.
Vegetables are a good example. Since there is no guaranteed price system here, farmers are at the mercy of fluctuations in the open market. That is why we hear stories of farmers selling onions at Re 1 / kg to the trader and the consumer paying Rs 30 for them. That is why we also see images of tomatoes thrown on the road by angry farmers when they fail to earn enough to cover the cost of transportation.
The experience of agriculture around the world tells us that the standard laws of supply and demand do not work in food production. That is why even the developed capitalist world, where free markets supposedly rule, subsidizes its farming communities. The reason for this is that agriculture has its own specific time, a particular rhythm, which cannot be controlled by machines. Factories make products in a very short period of time, often in less than a day. They can react to changes in the general demand or supply in the market very quickly.
Farmers start sowing, armed with the knowledge of the previous season’s demand. Even the most enlightened farmer, who keeps track of world trends, will have to commit to a certain acreage at planting time. If the supply or demand trends change during the weeks it takes for the crop to grow, there is nothing the farmer can do about it. That is why supply and demand can never coincide in agriculture. They always face each other with a seasonal lag.
In such a situation, the insured prices alone can ensure that farmers have a stable income. Otherwise, a sudden glut can bankrupt farmers. And we know this happens every year in places where farmers cannot access APMC mandis or obtain MSP. They cannot repay the loans they took out at the beginning of the season. Microfinance lenders and banks knock on your doors. Sometimes the farmer is so humiliated that he ends up killing himself.
Only the state can intervene to protect farmers from the vagaries of market forces. This can only be achieved through public procurement at guaranteed minimum prices. Private contractors and large agricultural companies will never be able to do that. Except in the world of naive textbook economics. In that world, if agricultural trade is open to everyone, farmers will have a wider range of buyers to choose from. This will help them demand more for their products and end up with better prices than the MSP system.
In this economic fairy tale, agricultural companies will compete with each other to improve the efficiency of transportation, marketing, and retail. This will help them cut costs and pay farmers more. In effect, everyone wins: farmers get more, companies get higher margins by reducing distribution costs, and consumers pay less.
In reality, the three new laws ensure that farmers have no power over large buyers of corporate produce. Purchase contracts must be agreed before the sowing season. The farmer must ensure that the quality of the crop meets the contracted standards. The buyer shall have the right to terminate the contract at any time. If there is a dispute, the farmer will not be able to go to any civil court. In effect, the farmer will be at the mercy of the corporate buyer.
The complexity of acquiring crops will ensure that a few large companies, which can assimilate a portion of the existing network of grain traders into their system, quickly capture the market and become monopsons. The companies will dictate the prices and the farmers will have no reserve option, as there will be no MSP system to protect them. The same commercial networks that give small farmers some price stability, due to public procurement, will simply freeze and be absorbed into the procurement structure of large companies. The vast sea of rural exploitation relationships will be preserved, but MSP’s lifeboat will be removed.
Had the Modi government been serious about increasing farm incomes, it would have strengthened the MSP-based acquisitions, rather than dismantling them. It would have set an adequate number of APMC mandis (India needs five times the number we currently have) instead of disempowering them. He would have fixed the APMC and tried to reduce the control of the Arhtiyas. Instead, it is simply throwing farmers at the mercy of market forces and big business. Global experience shows that this can only make things worse for farmers.
