Review Outdated Swaminathan MSP Formula to save Farmers & Economy
Swaminathan MSP Formula is disconnecting farmers from the Market Signals
By:
Vijay SARDANA
PGDM (IIMA), LLB, M.Sc. (Food Tech) (CFTRI), B.Sc. (Dairy Tech)
PGD in Arbitration, Intl. Trade Laws & ADR, IPR (WIPO), Justice (Harvard)
Advocate, Delhi High Court
Techno-Legal and Trade Policy Expert for Agribusinesses
Convenor, Food Security and Sustainable Agriculture Foundation
Twitter: @vijaysardana
The Swaminathan formula for MSP is based on an Outdated Cost Plus approach for India and will damage farmers' interest more, will also hurt the economy and encourage unsustainable agriculture practices more by supporting the inefficient and expensive agriculture production system and not including the vital factors of any economy factor like quality and productivity in MSP formula. Swaminathan Commission also not mentioned how to generate resources to support these recommendations and who should foot the bill?
The Concern with Swaminathan MSP Formula:
The Volume-5th of Swaminathan Report in section 2.3.5.6, page 57 says “Expand the MSP system, based on the cost of production including a reasonable rate of return on investment and ensuring a prompt and open-ended purchase for all major crops''.
Swaminathan commission failed to mention productivity criteria in the formula and also fails to mention the resources required to meet this recommendation and what will be the source of revenue to meet this obligation. Such recommendations will hurt farmers, natural resources and the economy of India. This is the reason that in the last 10 years productivity of paddy in Punjab has increased only by 2.7% whereas the MSP has gone up by 102%.
Changes in Wheat & Rice Yield and MSP in Punjab:
On one hand, MSP is going up because of poor productivity, but the commission of the commission agents is also going up because it is linked to MSP in percentage terms. This clearly shows that there is no incentive to improve productivity and no interest in conserving water resources.
Damage to Natural Resources:
According to Punjab State government data, With 82% of the state’s land area witnessing a huge decline in underground water levels and 109 administrative blocks out of 138 placed in ‘over-exploited’ category, a severe water crisis looms in the ‘grain bowl of India.’ Experts from the Central Ground Water Board (CGWB) have pointed to the massive rate of fall in subsoil water by a whopping 51 cm per year.
With successive Punjab governments liberally subsidizing power up to the present about Rs 45,000 per tube well from a power subsidy budget of Rs 12,000 crore, groundwater extraction has gone unabated.
There are over 12.51 lakh agriculture power consumers, there are over 2 lakh enjoying up to two subsidised agriculture power connections and over 10,000 have four or more connections. This power is also misused for the non-agriculture purpose that is why the reforms in electricity supply are also opposed by farmer unions.
Data compiled by the CGWB between 2006 and 2017 point to groundwater decline up to two meters in 55% of wells, between two to four meters in 21% wells and above four meters in 7% wells in Amritsar, Tarn Taran, Kapurthala, Jalandhar, Ludhiana, Moga, Mansa, Sangrur, Barnala, Fatehgarh Sahib and Patiala districts.
FCI is paying MSP for wheat-based on Swaminathan formula which is unfit for human consumption
If MSP is higher than world market price and there is no mention of quality in MSP formula, there is a surplus in the country, who will buy the wheat crop from India. According to International trade standards, as defined by Codex, FCI standard is not fit for human consumption for which FCI is paying MSP higher than the world market prices. Private trade will buy from the world market as per their requirements, which will be not only cheaper but also of better quality and there is no scope for exports. The government will have to buy 100% wheat, it means government just for wheat has to allocate about Rs. 2 lakh crores plus cost escalation of at least 6% to meet inflation plus FCI overheads of 14% to buy wheat, plus 12% for disposal to states for PDS plus corruption, manipulation and pilferage extra. means additional Rs. Fifty thousand (50,000) Crores are extra every year with an increase of 6%. More importantly, farmers will sell all their crops at MSP and will prefer to buy wheat at Rs. 2 or 3 per kg from the PDS system. This subsidized wheat will come back to FCI at MSP. This circular economy will never end in this country and this will be an endless pit.
MSP never creates additional demand but it blocks the productive national capital:
It is like flyover, it does not reduce traffic jams but it shifts the problem from one spot to another. The government procurement in the surplus economy does create initial extra demand but the total demand does not increase because after procurement the government sells the same thing in the same market via PDS.
The initial demand effect is neutralized. This trader knows that is why they do not rush to buy in mandies when the government is buying, they wait till the dust is settled and later they will ask their own agents and agencies to buy for them. When there is no rush by the traders to buy any commodity, this is a clear message that there is a surplus in the market and no one is keen to buy and stock it. This is also clearly visible because in the futures market there is no volatility on these crops. Farmers organisations should be educated to read these signals. Cost Plus based MSP formula is, in fact, encouraging buyers to look for alternate suppliers well in advance and they plan this keeping in mind long term horizon and they reduce investment in backend with farmers and supporting infrastructure.
Price movement before and after MSP procurement by Government agencies:
It is the misplaced assumption that a hike in MSP will benefit the farmers and economy when there is a surplus in the market. It will only hurt the economy because higher the MSP means higher the use of productive capital in procurement for the material which is not required. Hike in MSP also increases overhead costs including the commission of agents because all are linked on a percentage basis to MSP. The government procure will only block productive capital and create more liabilities for citizens and taxpayers
Only consumers can ensure sustainable profit to farmers, they should develop their systems to meet the market demands without government and government should intervene only in emergency situations.
Let us assume the government decided to make MSP legally binding for the PDS system, then what will happen.
Implications of Legally Mandated MSP
Once MSP becomes a legal policy instrument, there cannot be the preference for Punjab and Haryana or any other state. This will be against the natural justice and Right for Equality under the law as per the constitution.
No law can create a preferential treatment of anyone state at the cost of other states as per the constitution in any public procurement. All decisions will come under the scrutiny of the Courts. Farmers of other states have all the reason to approach the Hon’ble Supreme Court to seek justice and equal share in FCI procurement.
To avoid any litigation and to ensure transparency in the procurement system, the only option left with the FCI and government is to purchase the wheat for the central pool, from taxpayers money, as per the buffer norms on the pro-rata basis only. If that happens, let us calculate who will gain and who will lose in the new formula.
According to the available information from the Government websites, there are buffer norms for PDS systems. These buffer norms are important for budget allocation.
Table: Procurement of Wheat for the central pool as per the buffer norms:
Conclusion: The biggest loser will be Punjab, followed by Haryana and MP. The government cannot buy 100% wheat produced in India. The private sector will also buy limited quantities, provided it is cheaper than imports. Currently, there is surplus production of wheat in India, therefore no one will stock in bulk. The annual increase in MSP will make exports difficult and imports attractive. The situation will become more complex in the coming years. Mandatory MSP based procurement will create more problems for wheat farmers in Punjab and Haryana. A similar case is for paddy. The problem of mandatory MSP is clearly visible in the sugar sector. Farmers must understand how the economy works and how the country has to plan for all stakeholders within its limited resources.
My Recommendation to Government of India:
Review Outdated Swaminathan Formula and make it relevant to promote productivity, sustainability and quality in Indian agriculture system. Indian agriculture must move towards global competitiveness, first to prevent large scale imports and later focus should be on exports.
MSP is only useful in a shortage economy, not in a surplus economy. India needs a better & logical approach to help farmers in place of outdated current Swaminathan MSP formula. According to the Swaminathan formula, higher the cost of production, higher should be the MSP and higher will be the commission for the commission agents because all calculations are based on the percentage of the cost of production. This is an illogical formula and will make Indian agriculture system's most resource inefficient and environmentally unsustainable. Organic farmers and Zero budget farmers will get less MSP because their cost of production is less than farmers using expensive inputs and fuel. Is this logical?
The Swaminathan formula for MSP is an outdated approach for India and will damage farmers' interest more and will also hurt the economy more by supporting the inefficient and expensive agriculture production system and not ignoring the vital factors of any economy factor like quality and productivity. This may be the reason why Prime Minister Dr Manmohan Singh never implemented the Swaminathan Formula for MSP.
You are free to share your views on how to address this crisis and ensure a better return to the farmers without creating an economic crisis for the country.
It is true whenever plan for transformation is executed most of the stakeholders feel unsafe & unsecured . The present Farmers stalemate has been created Trust Gap between Govt & Farmers. The farmers have built a narrative that their agri economic interests shall be exploited by Corporates as price of their crops shall be determined by Demand & supply forces as they being illiterate hence have no knowledge of Digital Marketing Technology shall be puppets and at mercy of big industrial houses. Therefore, for them , these Three reformative bills are their enemy .
ReplyDeleteGovt has failed to gauge economic & political unrest , otherwise the issues could have been handled at much early stage when the unrest started in Punjab.
May I humbly suggest to Hon'ble Prime Minister that it should have strong Professionals in its cabinet as well as his Advisors .
Whenever we compare prices over time, we need to compare real prices and not nominal prices, which includes inflation. For instance wheat prices have increased by 70% and rice prices by 100% in ten years, implies wheat prices increased by 7% and rice prices by 10% per year. If we remove the current inflation rate of 5% per year in 2020, the wheat prices increased by 2% and rice prices by 5% per year i real terms which certainly is paltry. The wheat productivity has increased by 1.61 percent per year, and rice productivity by 0.2 percent per year. The Govt will not and cannot buy entire wheat or rice because marketed surplus is around 50% of which only 50% is roughly brought to APMCs. Therefore a rough estimate of Rs. 3.6 lakh crores are required to buy all the 23 food grains at MSP with the above assumption. And this amount of Rs. 3.6 lakh crores is the entire GST collection and how is this possible to spend this entire amount on procurement making MSP legal. Next, even with the current MSP regime, the whole sale prices of rice and wheat in most of the years are above MSP and also in Punjab and Haryana more than 70% of production are procured. More details here https://factly.in/data-msp-is-helping-but-only-the-rice-wheat-growing-farmers-from-a-few-states/#respond
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