A new deal to reshape the country’s antiquated agricultural sector has hit a dead end due to protests over three new laws that farmers say will affect their incomes.
The reforms allow companies to freely trade agricultural products outside of the so-called government-controlled mandi system, allow private traders to store large quantities of commodities for future sales, and establish new rules for contract farming.
Farmers fear that the reforms could pave the way for the government to stop buying basic products at minimum support prices (MSP) set by the federal government and leave them at the mercy of private buyers.
The government has insisted that it will continue to buy staples from MSPs, but farmers have demanded a law that guarantees minimum prices set by the state for all important agricultural products. The objective is to prohibit the sale of any agricultural product below the MSP threshold.
The MSPs, which began with the Green Revolution, mainly benefit rice and wheat producers because the government only purchases these two staples in large enough quantities.
Indian farmers receive lower prices than international farmers for their products due to rising costs of cultivation, inadequate markets and the government’s obsession with keeping food prices low. This has worsened the terms of trade for agriculture, measured as a ratio between the prices of agricultural products and the prices of manufactured goods. The crisis, therefore, is not one of low production, but one of low prices.
“An MSP is an important political tool that helped achieve food self-sufficiency because it gave farmers guaranteed prices. It is an important price signal. It is an administrative exercise that has no legal backing, ”said Abhijit Sen, an agricultural economist.
While the government announces MSPs for 23 major crops, setting them at 1.5 times the cost of the crop to account for inflation, analysts say a blanket law that requires no trader to buy any agricultural produce below this price threshold makes little economic sense.
The most immediate impact of such a law will be higher inflation. Higher MSP prima facie prices lead to higher overall prices. “Every 1 percentage point increase in MSPs leads to a 15 basis point increase in inflation,” said economist Sonal Varma. A basis point is one hundredth of a percentage point.
Economists say that an MSP mechanism that ignores dynamics, such as global demand and prices, creates distortions. If it is not profitable for private traders to buy from a federally set MSP, when demand is low, then the private sector will simply exit the markets. In such a scenario, the government simply cannot be a monopoly buyer of all products.
The government already acquires staggering amounts of surplus rice and wheat, which have become unmanageable. In September 2020, the government had 70 million tons of rice and wheat in federal stocks, while food safety regulations require reserves of 41.1 million tons as of July and 30.7 million tons as of October of each year.
If MSP is made mandatory, then India’s agricultural exports could become uncompetitive because government-insured prices are much higher than domestic and international market prices. No trader would want to buy at a higher price and export at a lower price.
So the assumption behind the new changes is that free competition in agricultural markets will ultimately result in a market offset price, in which the quantity supplied equals the quantity demanded, resulting in equilibrium.
According to economist Ashok Gulati, the cost of acquiring, storing and distributing rice to the poor is approximately Rs 37 per kg. In the case of wheat, it is around Rs 27 per kg. The cost to the company (CTC) of the labor of the Food Corporation of India (FCI) is six to eight times higher than the private labor. Therefore, the market prices of rice and wheat are much lower than what it costs the FCI to buy staple foods.
On the other hand, MSP’s policy benefits farmers in only a handful of states. The 70th round of the National Sample Survey showed that only 13.5% of rice growers and 16.2% of wheat growers actually received MSP.
While MSPs have encouraged food grains over other crops, they have led to serious imbalances in land and water resources and have displaced land from crops such as legumes and oilseeds, requiring costly imports. Additionally, MSPs, as administered prices, tend to distort market prices. They often ignore the demand side, international prices, export competitiveness, and the ecological impacts of crops like rice.
This also means that surplus stocks cannot be exported without a subsidy, which invites objections from the World Trade Organization. WTO rules limit government procurement of subsidized food programs by developing countries to 10% of the total value of agricultural production based on 1986-88 prices in dollars.
“Support for farmers can never be in doubt. But support in the form of MSP, which distorts the market, raises questions like whether we can move on to other ways to support farmers that cause less collateral damage, ”said Pravesh Sharma, a member of the Indian Council for International Research in New Delhi. Economic relations.
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