The fall in food prices means that 9 crops are currently below the minimum support price. For some crops the prices are about 6-7 percent below MSP but for about 5 others crops, the selling price is more than 20 percent below the MSP and in some areas even 50 percent. While this is good for urban poor and rural landless labour, this has led to rural distress, especially among farmers.
Dr Ashok Gulati, former chairman of the Agricultural Prices Commission and Dr Himanshu, associate professor at Jawaharlal Nehru University (JNU) spoke at length about why MSP policy has not worked and what are the ways to solve the rural distress. Q: Straight away to the data that we have 9 crops including pulses and the cereals are ruling at nearly 20-30 percent below minimum support prices (MSP) clearly states are not able to implement the policy, your thoughts?
Gulati: That is very clear that governments cannot swim away against the forces of demand and supply for too long and in so many commodities there are market fundamentals of demand and supply that operate and the basic rules of MSP is that it has to be a little below the market equilibrium price with a view that when you bring the produce to the market the market should not crash. Now if you announce a price which is way above the market equilibrium price then everything will come to you so you should be ready to procure. Now you don’t have an apparatus at present, the system is not in place, the money that will be required to procure literally everything of all pulses, of oilseeds and what not it is not in Rs 10,000-15,000 crore. You need Rs 100,000 crore to do that. You look at wheat and rice and where the food subsidy bills are and you cannot do even wheat and rice in 5-6 states beyond that market prices of paddy are 20 percent below MSP. So, when you are starting a new thing in pulses or oilseeds you should have a much better plan and that requires at least 2-3 years of building up a system of procurement, stocking and then releasing. Where do you release, what is the system in place in which you will be releasing.
Also MSP has to be dovetailed with the trade policy. I think the problem that we are harvesting today actually lies in when we had a bumper crop last year and we were still importing for the last two years massive imports of pulses so there are accumulated results in the system. We were very slow in looking at what the trade policy is and there was no connection of MSP policy with the trade policy. I think it is a very poor functioning at the policy level number one. Number two announcing as a political master stroke but you don’t have a system in place on the ground to give a support this will boomerang because farmers are concerned not with announcements but with what they are actually getting and now you take shelter, there is high moisture content therefore we will not provide – why don’t you fix up dryers in the market. That is what the investment is needed in the markets. All the APMC markets must compulsorily have an infrastructure including the dryers right there. So, I think it is all just basic dishonesty I would say in the system.
Q: Dryers fixing in the markets I don’t think anybody as thought through so much, is this a lack of so much administrative bandwidth or is it a lack of money?
Gulati: I would say it is poor policy, you cannot have an MSP just based on cost. Prices are determined by demand and supply. So, we must understand how pricing is to be done in the country, so first thing is there is bankruptcy of policy thought. It is a poor policy to start with. Number two you don’t have an apparatus to give a support to that. Number three you don’t have the money to do at that scale that is needed if you want to do it. All the three big failures.
Q: You said that dovetail minimum support price with the with the trade policy, how are global food prices now? Is there a scope for raising tariffs now?
Gulati: At present we already have pretty high tariffs. So we have to wait. The situation is the crude prices were low, international prices of all agri commodities were low. There is some turning around in international prices that will happen now because the crude prices have gone up so the energy cost in agriculture will go up, the transportation cost will go up. So, we hope in the next 3-6 months the international prices will take some rebound whether it is sugar or whether it is milk, or whether it is field crops. There would be some improvement.
Then in the Indian case because the rupee is also going down by 12-13 percent there would be an impact that the import parity prices will go up in rupee terms. So, I hope that in the next 3-6 months prices will take a left. How much? We have to still see, commodity by commodity how much is the excess stock in the economy at present.
Q: So you are expecting a rise in domestic food prices?
Gulati: Yes of course there would be some improvement.
Q: Let me proceed with this food prices trend that you are noticing, the standout feature of consumer price inflation (CPI) is the severe food disinflation. You are saying that is a going to end?
Gulati: I don’t think so. So, all the estimation that has been done I think you had the best so far. The future may not be that rosy as far as CPI is concerned in the next six months.
Q: So we are in for a rise in CPI that is interesting, you mean prices are going to harden?
Q: Statewide are you seeing any improvement, we heard about Madhya Pradesh Bhavantar Bhugtan Yojana doing very well so are at least some states doing good procurement?
Gulati: I would say politically because I consider this announcement of MSP as a cost A2 +FL, 50 percent on top of that. More a political announcement. They will do some procurement in the states where elections are going to be maybe Rajasthan, maybe Madhya Pradesh or maybe in Chhattisgarh. All other states, you look at where the prices are. If prices are 5 percent below MSP I would still give great credit to government. But there are 30-40 percent, even 50 percent below MSP. It is an utter failure of the policy and announcement.
Q: Two years ago when I interviewed you on the same topic of procurement you said that MSP works only for two crops in 5 states, is it still the same numbers, no improvement?
Gulati: In the 5 states that I say, in wheat and rice, in fact during the last 5-7 Madhya Pradesh and Chhattisgarh have improved their system but only for wheat and rice they have a system in place but for other crops and now you want to do it for 23 crops across India, government will become ‘baniye ki dukan’ – that is why I say bankruptcy in terms of policy thought. This is not the way to go. You will mess up the system. So please beware. You want to help the farmer, we are all with you but give directly through the income support.
Q: This income support for farmers is do doable? Are the logistic in place to reach, first of all to identify the right farmers and then reach them some amount of revenue?
Gulati: Yes. I mean India is fortunate today that that the IT giant, IT expertise of this country has to be used for the masses. The topend must give service to the bottomend and at a very low transaction cost with all the intermediaries taken off because this is where the corruption takes place. So you can directly put the money in their accounts and once you do, how much is land on per hectare basis – Telangana has gone ahead with that. Why cannot the center do it? What is loan waiver thing? What you are doing is crude income support and disturbing the credit markets.
Q: Dr. Gulati has practically decimated the minimum support price policy as something that was just an announcement and actually no implementation at all. Would you agree that this is just turning out to be a gimmick and government after government is getting away with it? How so?
Himanshu: I think Dr. Gulati is right in one sense that the MSP policy has not been followed by implementation and unless you follow it with implementation, it’s just a sheet of paper, it’s just a scrap of paper and that you can put into the dustbin but that doesn’t mean that one has to getaway further from the MSP system. We currently are in a system where the minimum support prices are essential because food prices for the last three months particularly have been in a negative territory, if you are looking at the WPI. So there is something that needs to be done.
Where I do agree with him is that the MSP is not the only instrument through which you can help the farmers and the reason for that is that the crisis is not just a price collapse which is happening because of international factors or other factors. It is a much deeper crisis of decline in demand, collapse of demand in the rural areas and it requires a multitude of efforts in terms of raising prices. You can see the same thing happening in terms real wages; those are also coming down. So there is a deeper crisis where MSP can, for some time, help you to arrest the price decline but it is not something which is going to help you in the long run dealing with all the kind of problems that we are dealing with rural areas.
Q: The point that Dr. Gulati was making, if you missed it, is that the infrastructure is lacking and therefore, MSP turns out to be meaningless except rice and wheat and there it is also becoming counterproductive because you are producing something which is already abundant.
Himanshu: The whole idea of minimum support price is to have government intervene when the prices are coming down. What has happened over the year is that the minimum support price has also become the procurement price. They are two distinct concepts and there are completely different instruments that are to be used in different times. However, what the government has been doing over the years is using the MSP as the only price intervention that it has in its arsenal – that is not going to work. So you do not have to do it for every crop but for some crops, and in those years when the prices are coming down is when it should be used – that amount of money is being spent, and we are spending almost Rs 160,000-170,000 crore as part of food subsidy but it is not going to the right people, it is not going to the right crops, it is not going to the right farmers and right states where it should actually go but in terms of success of MSP, it did help in stabilizing prices, it did help in making prices available but we need to have a better view of how to use the MSP system. It’s not that we are not spending money; we are spending good amount of money on food subsidy system.
Q: Let me expand this conversation – the country today has an inflation targeting system. Is that fundamentally creating a rural distress? How do you solve both? Inflation control is a good policy but at the same time how do we tackle rural distress that may emanate because of food disinflation?
Himanshu: I think there is a larger political economy issue that we are dealing with and that is why the food inflation issue also becomes part of this whole inflation management. It’s something that now been talked about by many other people that we are looking at the inflation targeting using only the instrument of monetary policy, is not something which is a right way of looking at inflation targeting. A large part of the food inflation is not something which can only be dealt by the instruments which are available as part of the RBI or the monetary policy. There are structural issues and those also need to be captured in that. However, the larger political issue is definitely there that large burden of cost of stabilizing the inflation target is on the farmers, on the rural economy whether in terms of the cut in subsidies or artificially keeping prices low in the rural economy. You need to find a balance between these two and that balance can only be achieved by having a proper view of what the agriculture sector means to you. It cannot simply be that they should be sacrificed for achieving stability in inflation targeting system without understanding how it is creating inflation in the first place.
Himanshu: One has to look at the whole issue in perspective, in the sense 600 million people didn’t come one day; we are inherited with largely agrarian economy and the process of structural transformation should have accompanied an economy which is growing at 6-8 percent or 10 percent is something that we didn’t follow and that is why you see the output share of agriculture has gone down dramatically but the employment share hasn’t gone down. You cannot wish away them and there is something which is a reality; I mean all the countries over a period of time did start 50-60 percent of the population in agriculture and then over a period of time shifted to the situation where there are 3 or 4 percent of the population in the agricultural sector. We have not done that but we need to achieve that but that cannot be achieved by simply lifting people out of agriculture and putting in non-agriculture.
Q: Agricultural distress is because we have 800 million people and a little more than half the population dependent on farm incomes and what are producing – about 250 million tonne. The United States is probably producing much more than this with 3 percent of the population dependent. So the problem is it not rural unemployment? Where I disagree with you that this crisis is not just of agriculture; in normal cases what would have happened is that the non-agriculture sector which is substantial now, which is roughly 50 percent of people are employed and it does account for a larger share of the income coming from rural areas would do well.
Now we are in a situation where the non-agriculture sector in the rural has also collapsed and it is certainly linked to the agricultural performance but it is the overall collapse of the rural economy and that is something which is putting pressure on agriculture as well as non-agriculture and that’s why I mentioned about demand crisis. If non-agriculture sector was doing well, the construction was doing, manufacturing was doing well, and there would have been an automatic demand rise in the rural areas and that would have pushed up wages that would have pushed up farm prices. So in a sense we cannot neglect the other part which is almost as important as the agriculture sector, which is the crop sector that we are more bothered about.
Q: I suppose this was exacerbated by demonetization, this non-agriculture rural sector as well, what would your prescription be to ensure that the non-agri rural sector is rendered robust?
Himanshu: Obviously, demonetization did create and there are several other factors. I mean continuous neglect for the last 10 years that we can think of, where the rural areas were neglected in different ways. Demonetization was maybe a final cushion blow which basically created the problem where we are finding it difficult to come out of it. I would say that the problem has been recognized since November 2013 when wages started going negative that is time we should have realized that there is something wrong with the rural economy. If you want to revive it today that is why agriculture and MSP can only be one and very small part of it in terms of revival of the agrarian economy. You need to put more money in the rural areas, you need to create more demand in the rural areas.
Himanshu: It is one way of raising the rural demand but also various other forms of, I mean money that can be spent. We are talking about a situation in the last four years where even the investment in agriculture, the real investment in agriculture has gone down by 3.50 percent, so we are talking about that situation. So this is a situation that we are talking about so the government is not spending on the rural development expenditure but also not spending on the basic investment in agriculture. So, all that Ashok Gulati was talking about in terms of creating rural infrastructure, marketing infrastructure we are talking about a situation where it has gone down in real terms. The credit growth to agriculture has dramatically collapsed. So, we need all of these efforts simultaneously to put up the rural economy back on track.
Q: Is MGNREGS, it themed to be an employment guarantee scheme is that one way to help rural distress? It is not just one instrument that we are talking about, it needs a multi multitude. I am just emphasizing it that probably all of this together needs to be done at a same time to make sure that the rural economy is becoming driver again. Q: Finally what about the solution that Dr. Gulati spoke in the end and you may have heard him, basic income to all farmers. Is that really doable? Can we even identify, put a filter, identify who are poor and reach it. I guess the way to reach it is available but how do you identify poor?
Himanshu: Where I agree with him is the spirit of it which is that rural incomes need to be increased and rural demand has to be increased. That is the whole idea of doing this kind of a basic income transfer without distortion of unnecessary interventions in the market which essentially is at least the government is not intervening, but it should. But I think the problem is very different. You are talking about some 700-800 billion people here compared to say 2-3 million people in the western countries. So, the whole size that we are talking about is a much larger size of intervention that we can even imagine of doing it.Last time we did a calculation and even if we wanted to do it only for say for example people in the agriculture sector or people below a certain threshold of income, it would cost anywhere between Rs 15-20 lakh crore, so you will be almost like nothing to spend and the entire government budget will be – that is the minimum. Even if you give then by at level of poverty line so that is something which is out of the picture. But what is important here is to recognize is that there are also fundamentally different problems which will come up which is that we have an economy which is where almost like 15-20 percent are sharecroppers. They don’t hold any land but they are working on agricultural sector. They are landless agriculture labourers, they are also depended on agriculture.
There are people who are absolute landlords who might be holding land but are not involved in agriculture. So, again when you go into the implementation issues you realize that this is more of an utopian solution than actually dealing with any reality that can help solve the problem.
What we need to do is to use the existing instruments rather than talk about something which is completely un-implementable and has absolutely no idea how is it going to work out and divert the issue into something else. So, that is where the spirit is fine, that incomes have to be raised, farmers need to be supported, but we have not yet exhausted all the instruments that are currently available to us. The real problem is that not that the government is not aware of it. It is just that it doesn’t have the will power, it doesn’t want to implement, and it doesn’t want to spend an instrument it already has. So we should go slow on this. Look at all these other options of doing it rather than simply suggesting something which is grand but ultimately will turn into some different problems.
Also Watch: Experts discuss why MSP policy has not worked and what are the ways to solve the rural distress