A fundamental distortion in farm policy

Looking at the way the agrarian crisis has built up in different pockets, it does appear that the overall approach to agriculture is marked by reactive, rather than clear-sighted, proactive thinking. Almost all policies are geared towards ‘price’. It is assumed that getting this right is the panacea for all the problems. It is not surprising that the focus has deflected from enhancing productivity, which is the right answer to most problems in agriculture.

There are four major issues with MSP.

First, the concept of minimum support price (MSP) has distorted the market. While MSP is effective for rice and wheat, where there is physical procurement by the FCI, it is only indicative for other crops. Increasing the MSP more to suit the interests of farmers rather than linking it with market dynamics has distorted the pricing system. Hence, when the MSP of soyabean is increased, market prices would increase even if the crop is good, as the MSP sets a benchmark. The MSP hence becomes an income-setter rather than a fair market price. Its contribution to inflation has also been distinct.

Second, the recent intent to criminalise sales taking place below the MSP makes no sense as the MSP does not distinguish between grades; it refers to an average fair quality. By forcing sales of higher quality at the base price, both farmers and traders are put in a spot. Such policies will induce farmers to lower their standards and pitch for lower varieties. Buyers would be reluctant to pay a higher price for a lower quality, and this can lead to a stalemate.

Third, procurement has been fixed for rice and wheat which is linked directly to the PDS. The back-to-back arrangement works well but is restricted to specific crops. Further, being an open ended scheme, the FCI has often been flooded with surplus grain which leads to problems of storage and wastage. It has been observed that in the past there have been sharp movements in production of pulses, sugar and oilseeds, which can upset market prices. There is a need to have minimum stocks of all such vulnerable commodities. Therefore, procurement and price stabilisation has to be undertaken for other commodities if it is to be meaningful.

Four, the Essential Commodities Act can be invoked at any time to restrict the amount that can be stored by the wholesaler and retailer. While the concept sounds right as it can tackle hoarding, the point missed is that most crops are harvested once a year and then stored for the rest of the year. Someone has to store the crop or else it cannot be made available to consumers throughout the year. This involves a cost of holding as well as risk of loss of quality, which is borne by the intermediary. How does one distinguish between storing and hoarding?

Five, trade policy is warped for farm products. At times, there are bans on exports. In times of shortage the time taken to recognise a shortage and import through a bidding process is long and time consuming. Often by the time imports arrive prices are already on the descent. There are also no policies for exporting surplus wheat or rice; if there is a cyclical failure, the government runs the risk of being blamed for having exported the commodity in the previous years. This was an issue with sugar in 2010. Hence, both exports and imports of farm products along with their strategies have to be defined for easy implementation.

As for the waiver issue, NPAs are a result of policies which skew the farmers’ income and ability to repay debt. Farmers choose crops based on the previous year’s prices. When a large number migrate to this crop as was witnessed with tur in 2016, prices come down sharply due to overproduction. This has created an anomalous situation where farmers’distress coexists with surplus production. The government is not in a position to absorb these surpluses as there is no system in place. The decision taken now in Madhya Pradesh, where traders are forced to buy soyabean at a higher price, creates problems of a different nature. The combination of MSP and absence of procurement has led to the present crisis in several parts of the country.

The concept of loan waiver is inherently flawed. Forgiving any loan creates a moral hazard, as it penalises those who are compliant. There is a perverse incentive to default in the knowledge that there would be similar waivers in future, which becomes self-fulfilling. The waiver scheme becomes a contagion, whereby farmers from all States demand the same dispensation, which becomes catastrophic for the State finances.

What then can be a solution? The MSP should be linked with procurement which in turn should not be open-ended or else there will be distortion in the market. The FCI, for example, is the biggest hoarder of rice and wheat by virtue of its mandate.

Rather than protecting the income of farmer, the incentives should be to increase productivity, which can mean access to seed and irrigation. Making the NAM (national agriculture market) real is a long-term solution but linking the same with contract farming or direct sale in towns and cities could be better still. Prices should always be determined by the market to reflect the demand-supply dynamics, and there should be no intervention.

Instead of focusing on prices to deliver income, the government should ensure that all crops are insured at least in the vulnerable areas. All farm loans should be linked with insurance so that the bank gets covered for loan loss while the government pays its share on insurance premium (which the present crop insurance scheme is supposed to entail).

Loan waivers should be the last resort and must always be made conditional so that there is no incentive to cheat. The criteria should be rigorous to ensure there is no adverse selection – which is a challenge given the level of political interference.

Quite clearly, the entire approach to farming has to be revisited. Short-term, emotive approaches should be eschewed.

The writer is chief economist, CARE Ratings. Views are personal