In-Depth: Codifying MSP Will Destroy Indian Agriculture And Farmers

More often than not, the government’s agreement to one bad idea is an incentive for the demanding parties to advocate for far worse ideas. In this case, the decision of the Modi government to repeal the farm laws has opened the floodgates for more demands from the eccentric farmers and their leaders, beginning with codifying or legalising MSP.

Losing both the carrots and the stick to appease the protesting farmers, the government has embraced a downward spiral to nowhere, and finds itself stumped, given the laws stand repealed but without the borders to Delhi being cleared.

Since wasting tax-payers’ money through prolonged protests is not enough, 'farmers' now want the government to have a Minimum Support Price (MSP) mechanism for every crop, and if Rakesh Tikait, the protesting personality for this season is to believed, this MSP should be equivalent to a few grams of gold.

Only if Tikait was with the Reserve Bank of India, the government could have shifted its focus from primitive gold reserves to crop reserves.

For a country where merely 5-7 per cent of the agricultural produce is procured at MSP, for about two-dozen crops, the shifting of narrative from more private sector participation in agriculture to MSP is a testament to the government’s failure in owning the narrative on this issue.

However, the government’s incapacity and failure to sell the laws to one state, fairly simple and straightforward in nature, cannot be an excuse to even debate a policy as flawed and disastrous as that of an inflated MSP extended to fruits, vegetables, forest produce, fisheries, and livestock.

Farmers who have narrowed down the three laws, or what would have been a watershed moment in the economic history of India, to the participation of two corporate giants are not qualified to dictate to the government on policy making.

In understanding why MSP cannot solve the problem of an average Indian farmer, Punjab serves as an ideal case study. For almost six decades, Punjab has linked its agricultural economy and the fate of its farmers with MSP, and yet, the happy ending is nowhere in sight.

Firstly, moving to a codified MSP mechanism shifts the focus from what the market needs to what the farmers want to grow, for the sake of an income safety net. Of the 7,830,000 hectares of cultivable land available in Punjab, 3,520,000 hectares is under wheat, and 3,103,000 hectares is under rice. As much as 75 per cent of the crop production in the state is made up of wheat and rice alone (2018-19).

However, as documented in the State Economic Survey of Punjab for 2019, this led to a critical imbalance on the demand side. For instance, in Punjab, the share of pulses under cultivated area dropped from 19.1 per cent in 1960-61, before the beginning of the Green Revolution, to merely 0.4 per cent in 2018-19, that is from more than 700,000 tonnes to around 27,000 tonnes.

The story with oilseeds was similar, with share of area under cultivation going from 3.9 per cent to 0.5 per cent for the same period, that is from 1,21,000 tonnes to 59,600 tonnes. Maize went from 6.9 per cent in 1960-61 to 1.4 per cent in 2018-19. Bajra went from 2.69 per cent in 1960-61 to almost nothing today.

For the love of MSP, the farmers moved away from the above crops towards wheat and paddy, and the numbers showcase the desperation of the farmers. In terms of percentage of cultivated area, paddy went from 4.8 per cent in 1960-61 to 6.9 per cent in 1970-71 to 31.3 per cent in 2000-01 to 39.6 per cent in 2018-19. For wheat, the percentage went from 27.3 per cent in 1960-61 to 44.9 per cent in 2018-19.

For 2017-18 alone, the Indian imports of pulses was estimated at around Rs. 28,000 Crore, and for oilseeds at around Rs. 400 Crore.

Now, if the farmers of Punjab had discarded their obsession for wheat and paddy and shifted to pulses and oilseeds, the import bills would have been lower. For instance, if Punjab’s production of oilseeds and pulses was consistent with the growth in the highest producing states (Madhya Pradesh, Maharashtra, Rajasthan), by 2027, the state could have aided India in saving close Rs. 6,000 crore in import bills for pulses and oilseeds.

Tomorrow, if MSP is guaranteed for everything cultivated under the sun, or an inflated MSP is assured to the farmers for certain crops, there would be little incentive for them to even consider oilseeds and pulses, or perhaps, move away from fruits and vegetables.

This would not only push India’s import bills up, as has been the case with oilseeds and pulses, but also dent India’s exports, say for dry-fruits, or other exotic fruits.

Amongst the MSP crops too, farmers would be inclined to cultivate wheat, paddy, cotton, bajra, and maize for their profit margins, creating a surplus, and a market where artificially inflated prices, in the name of farmer benefits and subsidies, rule the roost.

Two, the obsession with MSP comes with a severe disregard for the environment. For the MSP enthusiasts, Punjab, again, serves as the ideal case study. With 75 per cent cultivated area dedicated to two main MSP crops, the procurement was also high.

Of the 310.6 lakh tonnes of paddy procured in 2019-20, as many as 202.5 lakh tonnes were from Punjab, and of the 389.5 lakh tonnes of wheat, around 127 lakh tonnes were from the state itself.

For the ongoing Kharif Marketing Season of 2021-22, of the 185.73 lakh tonnes of rice procured from 25 states, more than 124 lakh tonnes came from Punjab and another 37 lakh tonnes came from Haryana. What could possibly go wrong for the environment, after all?

This guaranteed MSP procurement, in a disproportionate manner, has resulted in gruesome tales from Punjab, from falling water tables to cancer trains from Bhatinda, one of the Akali strongholds.

In Punjab, groundwater extraction for irrigation alone exceeds 90 per cent, more than any other state in India. Barring Rajasthan, the most over-exploited blocks in terms of groundwater are located in Punjab.

Of the 138 assessed blocks in Punjab, stated in the Dynamic Groundwater Resources Assessment of India — 2017 report, 109 are over-exploited, two as critical, five as semi-critical, and only 22 as safe.

The total annual groundwater recharge of the state was assessed as 23.93 bcm (billion cubic metres), and the annual extractable groundwater resource as 21.59 bcm.

Yet, the annual groundwater extraction was at 35.78 bcm, putting the extraction at 166 per cent, highest for any state in India. Even for Rajasthan, it’s less than 140 per cent.

Turns out, the groundwater used by Punjab for irrigation is almost equal to that used by Gujarat, Haryana, and Rajasthan, and merely 5 bcm less than what Uttar Pradesh, a state 4.9 times bigger than Punjab, uses, and turns out, by 2025, the state will start to run out of groundwater.

The quality of the produce also suffers. In an attempt to extract more MSP from the gullible government, the farmers put pressure on the land by excessive use of fertilisers.

In fertilizers, the ideal ratio for the use of Nitrogen, Phosphorus, and Potassium is 4:2:1. In 2017-18, the ratio at all-India level was 6.1:2.4:1, but in the same year, for Punjab, it was 28:8.6:9.1.

In 1990-91, it was 58.5:21.9:1. There is also the question of free electricity, paid for by the innocent tax-payer. In Punjab, even today, more than 30 per cent of the electricity generated is diverted towards agricultural activities.

The environmental degradation is not the only problem here, for Punjab, as the ideal MSP state for some, has linked its entire agricultural economy to two crops, and as the water tables fall, these water-intensive crops will become impossible to grow.

The farmers then will not only lose out on an assured MSP, but in some patches, the land will turn barren too, thus losing both the eggs and the golden goose.

Three, a guaranteed MSP regime would only push small and marginal farmers further into the clutches of such middlemen or ‘Arhatiyas’ as they are called in Punjab.

The resistance from the arhatiyas was visible, earlier this year in March, when the government in the Centre announced direct cash transfers for the farmers for their procurements.

The MSP dependency is a curse for the average Indian farmer, given more than 85 per cent of the farmers in India have a landholding size of less than 2 hectares, and leaves them at the mercy of the big landholder, or the middlemen when it comes to procurement through APMCs, and even small loans.

In Punjab, traditionally, the middlemen or the arhatiyas, facilitate the trade between the farmers and the agencies at the mandis. However, under the APMC system, the payment in Punjab still goes to the middlemen and not the farmers.

The middlemen, who also receive their commission within the payment, then pass on the payments to the farmers. However, there’s a catch here. One, there is no way for the government to ensure that the farmers are indeed getting the entire MSP.

Two, for farmers who are dependent on the middlemen for informal credit, the payment is made after the middlemen deducts their interest on the loan given to the farmer.

Often, the interest on these informal loans is very high, leaving the farmer with barely enough income, further intensifying the debt cycle.

Given the falling incomes in agriculture, increased costs of living, the farmers are never able to pay back the loans. Worse, unlike banks, where there is a proper repayment schedule available, no such paperwork is done by the middlemen and the entire payment process works at the discretion of the middlemen.

With no private avenues and MSP dependency, the small farmers are left out of formalisation, further pushing them away from formal credit.

Thus, even for the sake of argument, if one is to assume that a guaranteed MSP solves all the problems of the small farmers, why has there been resistance to direct cash transfers in Punjab, and what is the guarantee that the middlemen or other major landholders in different states won’t pursue the same methods.

Ironically, while the likes of Tikait and other arhatiyas from Punjab sold the fear of the monopoly of Ambani and Adani with the the three farm laws, it is them who are fighting to save their right of harassing the small farmer at will.

Four, one of the bigger tragedies in the repealing of the three laws was that the story of Punjab’s agriculture was confused as the story of India’s agriculture. There was a lack of focus on the 94 per cent agricultural produce that is traded through the private sector.

Somehow, a perception was sold that the entire country’s agricultural sector relies on MSP procurement, and now, building upon that perception, protests are being held to have the same special MSP treatment for farmers across India as it is in Punjab.

A look at the past MSP procurement numbers is warranted here. For the 22 crops under MSP, the procurement rarely exceeded 30 per cent of their total market value.

Of the 10 main procured crops under MSP, the purchase accounted for only 33 per cent of their total market value in the cropping season of 2019-20.

For the other 19 crops, barring wheat, paddy, and cotton, the purchases made for merely 9 per cent of their total market value. So much for MSP saving the average Indian farmer and agriculture sector.

For procurement as a percentage of production, between 1996-97 to 2017-18, for paddy, wheat, cotton, and mustard, the average stands at 28, 25.8, 9.1, and 4.1 per cent respectively.

In 2009-10, as much as 36 per cent of the paddy produced was procured, the highest for the duration of two decades. For wheat, it was 40.2 per cent in 2011-12.

For cotton, it was 57 per cent in 2008-09 while other years recorded dismal procurement, and for mustard, barring 2005-06, when the procurement was 27 per cent as a percentage of the production, MSP buyout is negligible.

Thus, while Punjab may see majority of its crop being procured at MSP, the story is not the same for other states, not even remotely, and in the larger scheme of things, MSP procurement only constitutes a very small part of the trade — less than 5 per cent, as per some estimates.

Five, the fiscal room. What would it, therefore, cost to procure all the 23 MSP crops, that is 100 per cent of what is being produced, irrespective of quality or demand or warehousing infrastructure requirements?

For 2020-21, the MSP value of the total output of the 23 notified crops was around Rs. 11.9 lakh crore. Subtracting the part reserved for the consumption of farmers and other farming needs leaves around Rs. 9 lakh crore for the market.

The government, through several agencies, and for several crops including pulses, oilseeds, cotton, and even sugarcane, made procurement of around Rs. 3.8 lakh crore of agricultural produce, thus leaving crops worth more than Rs. 5 lakh crore for the open markets.

Now, if Tikait’s demands are to be agreed upon, the government is not only supposed to buy crops worth Rs. 5 lakh crore or more, but also start deliberating on procurement for fruits, vegetables, livestock, fisheries, and other forest produce.

Where will the money for this fiscal suicide come from?

The wisdom erupting from Singhu, Ghazipur, or Tikri will put the onus on the Ambanis and Adanis to pay more taxes to sponsor more MSP, and to curse India’s economy forever.

For all we know, the Supreme Court, already unimpressed with highways, may find the ideal idea of India in endless MSP support and not infra-investments.

Six, the MSP regime will also be a hindrance for greater private sector participation, hurting India’s long-term growth prospects. Currently contributing around 16 per cent of India’s GDP, the market potential of India’s agritech market alone is close to $24 billion and the turnover is estimated at more than $150 billion.

The penetration, however, is less than one per cent.

The participation of the private sector is warranted for other reasons as well. Contract farming, for instance, can help farmers shift to cultivating fruits and vegetables, given their rising demand.

Through supply chain improvements, private sector participation (PSP) can tackle the current problem where close to 40 per cent of the food grains produced are wasted in either transition or godowns.

With unpredictable shifts in climate — given a mere one-degree centigrade increase in temperature can result in the loss of 4-5 million metric tonnes of wheat, and untimely rains impacting small farmers, sometimes wiping their entire crop out — the PSP and investment in climate-resilient technologies would go a long way in aiding India’s agricultural sector.

'More crop for each drop' would also be made possible with increased investments in data-precision irrigation techniques as the declining groundwater levels begin to haunt India, starting with Punjab, where the groundwater exploitation is the most.

Thus, the government, in their bid to appease the protesting farmers and middlemen from Punjab, should not even look at the remote possibility of codifying MSP for the three main crops, for it will only fuel protests from other parts of the country in the name of politics.

Codification of MSP, for reasons explained above, is an attempt of a few landholders to ensure that India’s farmers languish in the stone age, remain around the poverty line, and are constrained at will.

Bending to any of their demands would be a crime by the government, bigger than that of repealing the laws.

The three laws would have resulted in more infrastructure, warehousing and logistics facilities, technology and data science applications, investments in high-yield seeds and sustainable practices, and most importantly, increased income growth for the farmers.

On the other side, an assured MSP, codified into a law, would mean the death of Indian agriculture, and consequently the average farmer.