Will Increasing Minimum Support Price Cure Indian Agriculture?

The finance minister in the Union Budget 2018–19 has announced the proposal to fix the minimum support prices (MSP) at 50% in excess over the cost of production of crops. This article argues that even if it is implemented properly, the MSP will benefit only a small section of farmers. It argues that along with the MSP, proper implementation of non-price factors can have a far-reaching impact in terms of enhancing the livelihood security of the rural poor that constitutes the bulk of the Indian population. 


Impact of a Rise in the MSP and Shifts in Terms of Trade in Favour of Agriculture

Let me base this analysis on the assumption that MSPs are, on an average, almost 60% more than the C2 cost of cultivation[1] that has been a long-standing demand of farmers. Let me also assume that there are enough procurement agencies, so the farmers will not lose out due to lack of these agencies in the rural areas. These are rosier assumptions compared to the ground realities. The question is whether an increase in MSP and shifts in the terms of trade in favour of agriculture will benefit the farmers.

In one word, the answer is no. Farmers in India are not homogeneous entities. According to the National Sample Survey Office (NSSO) data, an overwhelming majority of farmers (92%) in India are either small or marginal farmers who cultivated not more than 2 hectares (5 acres) of land in 2010–11. Thus, an overwhelming number of households cultivate small tracts of land. Given the tiny size of plots of land for a substantial number of farmer households, most of them (if not all) will be net buyers of agricultural commodities, particularly foodgrains. This also implies that only a small minority of households are net sellers of foodgrains. Thus, any rise in MSP will be beneficial for a tiny section of farmer households. 

Rawal (2016) had argued, based on studies in villages located in various parts of India, that top five households derived substantial incomes from crop production. According to the Agricultural Statistics at a Glance, Ministry of Agriculture and Farmers Welfare, the sale of power tillers had increased almost three times from Rs 17,000 in 2004–05 to Rs 49,000 in 2015–16; for tractors the corresponding figures are Rs 2,48,000 and Rs 5,71,000. These figures indicate that the ability to invest by the surplus appropriating sections in the rural areas increased in a period when economic conditions in the Indian countryside have been characterised as one of agrarian crisis. 

While an increase in the MSP and shifts in the terms of trade will hasten the process of accumulation by the rich sections in rural India, it will have an opposite impact on the poor who constitute the bulk of the population. A rise in the prices of agricultural commodities will lead to a rise in the prices of industrial commodities that use the former as raw materials. For the poor, whose incomes are typically un-indexed with prices, any rise in prices of industrial commodities will mean lessening of expenditures on food, thereby jeopardising food security. 

The increase in MSP and shifts in the terms of trade in favour of agriculture will also hasten the process of accumulation. However, the surplus-generating sections in the countryside comprise only a small minority of households. The rural rich, who are also the surplus producers, have better transport arrangements and infrastructure facilities. This enables them to sell agricultural commodities through procurement agencies, if there is a steep hike in MSP. Since they are the biggest producers, supply in the open market reduces, thus leading to a rise in prices. A NITI Aayog (2016) study found that in certain states and for certain crops, MSPs are lower than the wholesale prices. In that case, surplus producers will be keen to sell their produce in the open market rather than to the government procurement agencies. A steep hike in MSP (more than the wholesale prices across all states) will provide an incentive to these producers to sell their output through the government procurement agencies and hence, supply in the open market will be reduced and price will rise. In the absence of a well-functioning public distribution system (PDS), it may endanger food security of substantial sections of the rural poor. 

The rural poor, who are net buyers of foodgrains, will be adversely affected due to erosion in real incomes with rise in prices (Patnaik 1983; Bharadwaj 1997). Mitra (1977) had argued that an increase in foodgrain prices, with a shift in the terms of trade in favour of agriculture, will reduce the non-food expenditure of the urban and rural poor. This is because incomes of the poor are un-indexed with prices, and demand for food is inelastic with respect to price. Thus, the demand for food and industrial goods will decline, the former by a lesser amount than the latter due to its inelastic nature. While decline in the demand for food will jeopardise the food security of the poor, contraction in demand for industrial goods will lead to industrial stagnation (Nayyar 1994).

According to Bharadwaj (1997), “… the price of agricultural goods, particularly food as a prime wage good, influences the level of wage demands; the prices of agricultural commodities as raw materials affect industrial prices and may, depending upon the wage-bargaining and mark-up practices, influence an inflationary movement of prices.” 

Thus, increase in MSP can result in inflation in the economy. Also, increase in income of the rich in the countryside will stimulate luxury consumption which is import-intensive and hence can negatively impact the balance of trade in the economy (Nayyar 1994).

Agrarian Structure and Benefits from the Implementation of MSP

The agrarian structure in India is characterised by a skewed distribution of land and non-land resources. Unequal access to resources results in a situation in which a small section of the population in rural India dominates the majority who are poor, across credit, labour and output markets. Typically, Indian villages are characterised by the existence of rich peasants who produce for maximising profit and traders/moneylenders whose activities are based on the proliferation of patron–client relationships that are pre-capitalist in nature. While the rich peasant undertakes investment on land for enhancing profit from production, the same person ceases to be a capitalist when he performs the role of a trader/moneylender. In this role, the rich peasant advances credit to a poor farmer in return for the purchase of agricultural produce at a reduced price (lower than the MSP and price in the open market) through the receipt of commissions.

Thus, for the poor farmer, credit tying arrangements have repercussions in the output market. He receives credit with (tying) conditions that include: (a) selling of the agricultural commodity only through the trader from whom loan was taken, and (b) paying commission to the trader by way of selling agricultural commodities (Kannan 2017). In another study, De Roy (2013) had argued that traders/moneylenders were typically the wealthiest persons in the village and were involved in production for profit. He argued that in the credit market, they advanced loans with tying arrangements that forced the poor and marginal farmers to sell only through them, with the condition that for 1 kg of output being sold, 60 grams had to be paid as commission to the trader. He argued that the poor and marginal farmers were forced to take loans from traders for working capital needs which the local commercial bank was unwilling to provide. As a result, they failed to receive open market prices that were typically higher than the price they received for their output. 

Given the unequal agrarian structure in India, the poor and marginal farmer could have benefited if he had access to cheap credit from a commercial bank. He could also have gained if the trader did not have a dominant position in the village—which essentially means that his resource base would have been narrower and the trader would not be in a position to dictate terms and conditions of the credit advanced. However, that would have entailed substantial changes in the existing agrarian structure with a decline in the concentration of resources among a small minority. In absence of any such changes, upward revision of MSP will not lead to desirable outcomes. 

What Better Options Can There Be? 

In view of the existence of a high degree of inequality and a hierarchical social and economic structure, rise in the MSP is not necessarily a panacea to the evils that plague Indian agriculture. Better options can be thought of in terms of: (i) providing cheap finance and subsidised inputs to the actual cultivators of land (primarily small, marginal, and poor peasants) to increase profitability from crop production; (ii) increasing government investment in rural infrastructure like irrigation, power, roads, and transport; (iii) increasing allocation for rural employment generation programmes like Mahatma Gandhi National Rural Employment Guarantee Scheme that can lead to increase in employment opportunities, thereby leading to tightening of the rural labour markets and supplement household incomes of small, marginal, and poor farmers with enhancement in food security; (iv) provision of universal PDS in rural areas; and (v) altering the agrarian structure that could lead to more equal access to resources. 

The first four options can lead to a widening of the size of the market, which, in turn, can stimulate industrial growth due to improved capacity utilisation of the industrial sector. Option (v) can lead to enhancement in food security for the poor people. To base discussions on Indian agriculture only on the MSP would mean missing out on these important issues that could have positive far-reaching impacts on the lives of farmers in India. While MSPs can benefit a small section of rural households, the non-price factors mentioned above can bring in additional benefits to the sector. 

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