Themes > Policy Watch
04.04.2002
Minimum Support Prices and the Food Crisis
C.P. Chandrasekhar
The changes in minimum support prices for rabi season
crops illustrate the fact that the government is bent on pursuing an
infeasible strategy for resolving the ‘food crisis’ it has itself
engineered.
The recent announcement of the minimum support prices (MSP) for rabi season wheat, oilseeds, pulses and barley reveal the rather convoluted manner in which the government is attempting to muddle its way out of a ‘food crisis’ of its own making. Going against the recommendations of the Commission for Agricultural Costs and Prices (CACP), the Food Ministry and the Finance Ministry, which had argued for a freeze in the support price for wheat, the Cabinet has increased the MSP for wheat by a small but significant Rs. 10 per quintal to Rs. 620 per quintal. It has however accepted the CACP recommendations to hike the MSP for oilseeds (rapeseed/mustard and safflower), gram and masur by a substantial Rs. 100 per quintal to Rs. 1300, Rs. 1200 and Rs. 1300 respectively, while keeping the MSP for barley at last year’s level of Rs. 500 a quintal.
These changes have to be assessed in terms of their implications for the resolution of the peculiar ‘food crisis’ confronting the government. This takes the form of the accumulation of huge food stocks in the hands of the Food Corporation of India (FCI) even when poverty, endemic hunger and periodic reports of starvation deaths persist. In the case of wheat, the new marketing season is expected to begin with stocks of 25 million tonnes, as compared with the minimum required buffer stock at this time of year of 4 million tonnes. Such large stocks in both wheat and rice have proved wrong and aborted the government’s policy of curtailing food subsidies by raising the issue prices of food distributed through the public distribution system. Rising MSPs that have ensured larger procurement and rising issue prices that have reduced offtake from the PDS, have together contributed to the burgeoning of stocks held by the FCI. Since this increases the bill incurred by the FCI in the form of carrying costs, the food subsidy has in fact increased, though it currently finances meaningless stock accumulation rather than serving as a form of support to the poor.
The congruence of opinion across the Food and Finance Ministries and the CACP, regarding the need to freeze the MSP for wheat, comes as a response to this crisis. Inasmuch as the freeze may help moderate the level of sale by farmers to the procuring agencies, it is seen as one of the many means required to bring down the embarrassing level of food stocks. However, this superficial congruence conceals the fact that the demand for an MSP freeze emanates from analysts with two different perspectives. There are those who still believe that the provision of a cost-plus ‘remunerative’ floor to farmers is necessary to encourage productivity increases and growth in the agricultural sector. In normal circumstances, they would have supported an increase in MSP since, the low average rate of wholesale price inflation notwithstanding, no one can deny that, in a period when fertiliser subsidies are being phased out and power tariffs are being raised, agricultural costs would have risen. If yet they support the freeze, this is because in their view, the government’s practice of succumbing to pressure from the farm lobby and providing a ‘bonus’ over and above the floor price recommended by the CACP has taken wheat and rice prices to unwarrantedly high levels in recent years. The freeze is seen as an effort to rollback the MSP to warranted levels, which would, hopefully, reduce procurement.
There are, however, two problems with this argument that seeks to deal with the problem of foodstocks by acting on the supply of food to the procurement agencies. To start with, it leaves unresolved the question as to how the existing high level of stocks at the start of the procurement season can be reduced. But even if the problem created by pre-existing stocks is ignored, the argument misses out on the possibility that any cost-plus floor in the form of an MSP could result in procurement levels that keep stocks high, given the current regime for disposing of those stocks.
It is presumably the latter possibility that explains the CACP’s decision to recommend a substantial hike in MSP’s for oilseeds and pulses that would encourage a shift in acreage away from cereals to these kinds of crops. While this may have a short-term impact on procurement and stock levels, in the long run diversification ensured through the procurement price mechanism would lead to the recurrence of the same problem. With trade in agricultural commodities liberalised under the WTO, the high floor price for oilseeds and pulses may lead to a situation where the market is dominated by imported varieties that are cheap, rather than domestic supplies procured at a cost-plus price and routed to the market through the procurement system that would be expensive. The consequent fall in offtake of domestic oilseeds and pulses may force the government to hold large stocks of these commodities. The structure of official stocks may change from cereals to other commodities, but stocks could remain high keeping subsidies required to finance carrying costs high as well.
This implies that the problems of existing and likely future accumulation of food stocks cannot be dealt with from the side of supply, so long as the procurement system is seen as a necessary support to Indian farmers, which it is. Instead, the problems have to be dealt with from the demand side. This requires not just the strengthening of the public distribution system through which subsidised food should be supplied to all those wanting to access such food supplies. It also requires a change in mind-set. Food stocks need to be seen not as a liability created by the procurement system but an asset, which should be put to use in food-for-work programmes geared to enhancing rural and urban infrastructure and increasing, thereby, productive employment and activity and reducing poverty. This would have economy-wide effects as well that would help restore industrial growth and contribute to an increase in government revenues. It would also reduce the food stock “burden” and help curtail subsides paid out in the form of carrying costs. Holding back on such programmes on the ground that they would require rupee resources that would widen the government’s deficit is completely indefensible.
Failure to emphasise the demand-side solution to the problem of excess stocks, strengthens the arguments of those who demand an MSP freeze merely as the first step towards dismantling the procurement system by curtailing its role only to that of garnering stocks adequate to maintain the minimum buffer. This is seen as a logical corollary of trade liberalisation and the effort to reduce the fiscal deficit. The needed reduction in stock levels, needless to say, cannot be ensured through a minimum support price programme accompanied by limited procurement, as some have suggested it should, since that would make the decisions as to when, where and how much to procure completely arbitrary and the system subject to misuse for political patronage. Not surprisingly, many advocates of food stock, food subsidy and fiscal deficit reduction have gone the whole way and suggested that the system created after the agrarian crisis of the mid-1960s to ensure that farmers are supported with a cost-plus, ‘remunerative’ floor should be done away with.
While this would deal, most regressively, with the ‘problem’ of large food stocks, by foreclosing supply to the government, it does not address the problem of pre-existing stocks. Releasing a part of these stocks in the market would depress prices to an extent that would render the effort to dismantle the MSP-based system politically indefensible. It is for reason that the government has been experimenting with the possibility of handing over pre-existing stocks at extremely low prices to exporters. This experiment with disposing off FCI stocks through exports began in November 2000, and 1.62 million tonnes of wheat were exported in 2000-01, and 3.18 million tonnes of wheat and 1.5 million tonnes of wheat have been delivered for export till February 15 of the financial year 2001-02. In this year’s EXIM policy this drive is to be strengthened by subsidising transport costs on food delivered for exports. As part of the ongoing effort to do away with the MSP-based procurement system, which is partly necessitated by the drive to reduce food subsidies provided to domestic consumers, the government finds it necessary to subsidise consumers abroad, at least for some time.
Fortunately, this whole misconceived effort is bound to prove politically infeasible. When farmers in the US and the EU are being subsidised in large measure through income support schemes of various kinds, a government that is subjecting domestic producers to import competition can hardly work to dismantle the little support it has provided its own farmers. The fact that the government could not implement even the recommendation that the MSP for wheat should be frozen because it has been increased to higher than warranted levels in the recent past, shows that in a period when huge concessions are being provided to domestic and foreign industrial and financial capital, the demands of the agricultural community cannot be completely ignored. Realising this, it would be best for the government to work to ease the food stock crisis through feasible, demand-side measures, in particular, through the launch of a massive food-for-work programme. But if recent evidence of the government’s incompetence on matters of economic governance is an indication, good sense is unlikely to prevail.
The recent announcement of the minimum support prices (MSP) for rabi season wheat, oilseeds, pulses and barley reveal the rather convoluted manner in which the government is attempting to muddle its way out of a ‘food crisis’ of its own making. Going against the recommendations of the Commission for Agricultural Costs and Prices (CACP), the Food Ministry and the Finance Ministry, which had argued for a freeze in the support price for wheat, the Cabinet has increased the MSP for wheat by a small but significant Rs. 10 per quintal to Rs. 620 per quintal. It has however accepted the CACP recommendations to hike the MSP for oilseeds (rapeseed/mustard and safflower), gram and masur by a substantial Rs. 100 per quintal to Rs. 1300, Rs. 1200 and Rs. 1300 respectively, while keeping the MSP for barley at last year’s level of Rs. 500 a quintal.
These changes have to be assessed in terms of their implications for the resolution of the peculiar ‘food crisis’ confronting the government. This takes the form of the accumulation of huge food stocks in the hands of the Food Corporation of India (FCI) even when poverty, endemic hunger and periodic reports of starvation deaths persist. In the case of wheat, the new marketing season is expected to begin with stocks of 25 million tonnes, as compared with the minimum required buffer stock at this time of year of 4 million tonnes. Such large stocks in both wheat and rice have proved wrong and aborted the government’s policy of curtailing food subsidies by raising the issue prices of food distributed through the public distribution system. Rising MSPs that have ensured larger procurement and rising issue prices that have reduced offtake from the PDS, have together contributed to the burgeoning of stocks held by the FCI. Since this increases the bill incurred by the FCI in the form of carrying costs, the food subsidy has in fact increased, though it currently finances meaningless stock accumulation rather than serving as a form of support to the poor.
The congruence of opinion across the Food and Finance Ministries and the CACP, regarding the need to freeze the MSP for wheat, comes as a response to this crisis. Inasmuch as the freeze may help moderate the level of sale by farmers to the procuring agencies, it is seen as one of the many means required to bring down the embarrassing level of food stocks. However, this superficial congruence conceals the fact that the demand for an MSP freeze emanates from analysts with two different perspectives. There are those who still believe that the provision of a cost-plus ‘remunerative’ floor to farmers is necessary to encourage productivity increases and growth in the agricultural sector. In normal circumstances, they would have supported an increase in MSP since, the low average rate of wholesale price inflation notwithstanding, no one can deny that, in a period when fertiliser subsidies are being phased out and power tariffs are being raised, agricultural costs would have risen. If yet they support the freeze, this is because in their view, the government’s practice of succumbing to pressure from the farm lobby and providing a ‘bonus’ over and above the floor price recommended by the CACP has taken wheat and rice prices to unwarrantedly high levels in recent years. The freeze is seen as an effort to rollback the MSP to warranted levels, which would, hopefully, reduce procurement.
There are, however, two problems with this argument that seeks to deal with the problem of foodstocks by acting on the supply of food to the procurement agencies. To start with, it leaves unresolved the question as to how the existing high level of stocks at the start of the procurement season can be reduced. But even if the problem created by pre-existing stocks is ignored, the argument misses out on the possibility that any cost-plus floor in the form of an MSP could result in procurement levels that keep stocks high, given the current regime for disposing of those stocks.
It is presumably the latter possibility that explains the CACP’s decision to recommend a substantial hike in MSP’s for oilseeds and pulses that would encourage a shift in acreage away from cereals to these kinds of crops. While this may have a short-term impact on procurement and stock levels, in the long run diversification ensured through the procurement price mechanism would lead to the recurrence of the same problem. With trade in agricultural commodities liberalised under the WTO, the high floor price for oilseeds and pulses may lead to a situation where the market is dominated by imported varieties that are cheap, rather than domestic supplies procured at a cost-plus price and routed to the market through the procurement system that would be expensive. The consequent fall in offtake of domestic oilseeds and pulses may force the government to hold large stocks of these commodities. The structure of official stocks may change from cereals to other commodities, but stocks could remain high keeping subsidies required to finance carrying costs high as well.
This implies that the problems of existing and likely future accumulation of food stocks cannot be dealt with from the side of supply, so long as the procurement system is seen as a necessary support to Indian farmers, which it is. Instead, the problems have to be dealt with from the demand side. This requires not just the strengthening of the public distribution system through which subsidised food should be supplied to all those wanting to access such food supplies. It also requires a change in mind-set. Food stocks need to be seen not as a liability created by the procurement system but an asset, which should be put to use in food-for-work programmes geared to enhancing rural and urban infrastructure and increasing, thereby, productive employment and activity and reducing poverty. This would have economy-wide effects as well that would help restore industrial growth and contribute to an increase in government revenues. It would also reduce the food stock “burden” and help curtail subsides paid out in the form of carrying costs. Holding back on such programmes on the ground that they would require rupee resources that would widen the government’s deficit is completely indefensible.
Failure to emphasise the demand-side solution to the problem of excess stocks, strengthens the arguments of those who demand an MSP freeze merely as the first step towards dismantling the procurement system by curtailing its role only to that of garnering stocks adequate to maintain the minimum buffer. This is seen as a logical corollary of trade liberalisation and the effort to reduce the fiscal deficit. The needed reduction in stock levels, needless to say, cannot be ensured through a minimum support price programme accompanied by limited procurement, as some have suggested it should, since that would make the decisions as to when, where and how much to procure completely arbitrary and the system subject to misuse for political patronage. Not surprisingly, many advocates of food stock, food subsidy and fiscal deficit reduction have gone the whole way and suggested that the system created after the agrarian crisis of the mid-1960s to ensure that farmers are supported with a cost-plus, ‘remunerative’ floor should be done away with.
While this would deal, most regressively, with the ‘problem’ of large food stocks, by foreclosing supply to the government, it does not address the problem of pre-existing stocks. Releasing a part of these stocks in the market would depress prices to an extent that would render the effort to dismantle the MSP-based system politically indefensible. It is for reason that the government has been experimenting with the possibility of handing over pre-existing stocks at extremely low prices to exporters. This experiment with disposing off FCI stocks through exports began in November 2000, and 1.62 million tonnes of wheat were exported in 2000-01, and 3.18 million tonnes of wheat and 1.5 million tonnes of wheat have been delivered for export till February 15 of the financial year 2001-02. In this year’s EXIM policy this drive is to be strengthened by subsidising transport costs on food delivered for exports. As part of the ongoing effort to do away with the MSP-based procurement system, which is partly necessitated by the drive to reduce food subsidies provided to domestic consumers, the government finds it necessary to subsidise consumers abroad, at least for some time.
Fortunately, this whole misconceived effort is bound to prove politically infeasible. When farmers in the US and the EU are being subsidised in large measure through income support schemes of various kinds, a government that is subjecting domestic producers to import competition can hardly work to dismantle the little support it has provided its own farmers. The fact that the government could not implement even the recommendation that the MSP for wheat should be frozen because it has been increased to higher than warranted levels in the recent past, shows that in a period when huge concessions are being provided to domestic and foreign industrial and financial capital, the demands of the agricultural community cannot be completely ignored. Realising this, it would be best for the government to work to ease the food stock crisis through feasible, demand-side measures, in particular, through the launch of a massive food-for-work programme. But if recent evidence of the government’s incompetence on matters of economic governance is an indication, good sense is unlikely to prevail.
© MACROSCAN 2002