Overhauling farm sector

Government’s policy of MSP led procurement may not prove to be a sustainable solution to the growing woes of the agricultural sector. In view of strengthening of JAM trinity, along with direct cash transfers, other alternatives like Price Deficiency payments (PDP) can prove to be more effective in ameliorating farming distress. However, its success will largely depend on how well the states implement the reforms related to recently passed ordinances on APMC mandis, contract farming and Essential Commodities Act.

Agriculture in India accounts for about 50% of the workforce. However, it is the farmer that is always the worst affected section from any economic shock. Be its government announcement of demonetisation in 2016 or latest pandemic outbreak, farmers have truly borne the brunt of such jolts. Further, they continue to suffer from vagaries of nature – heavy monsoon, drought, and pest attack leading to massive “sunk cost”; thereby pushing them with no alternative means to survive and in some cases driving them on verge of committing suicide.

To protect the interest of farmers against excessive fall in prices, government announces Minimum Support price (MSP) for 22 crops through the year on the recommendations of CACP (Commission for Agricultural Costs and Prices).  In addition, to ensure food security, FCI procures these foodgrains from farmers at pre announced MSPs to maintain its buffer stocks for Public Distribution System (PDS) under NFSA, 2013. However, government continues to struggle with problems of excessive stocks with FCI and poor warehousing facilities. Most part of the procured grains is kept in open area under poor Cover & Plinth (CAP) system of storage where it faces a high risk of rain damage, rotting and theft. Further, a leaky public distribution system with prevalence of corruption at every step, wastage of grains during transportation and diversion of food from ration shops to open market remains a serious concern that not only reduces the effectiveness of PDS but also inflates food subsidy bill of the government. In addition, targeting errors with respect to identification of BPL and APL households remains a problematic area, while issue of illegal (ghost) ration cards with some households holding multiple cards also remains worrisome for the authorities. This raises a big question mark on the functioning of MSP led procurement and PDS system of subsidised grain distribution.

Due to the “open ended” grain procurement policy at MSP, government’s foodgrain coffers are overflowing. As on June 1, against the desired stockpiling limit of 41 million metric tonnes (mmt) required for maintaining PDS, FCI had unprecedented inventories of 97 mmt in the central pool, leading to “excess stocks” of at least 50 mmt. Such oversupply of foodgrains can be truly attributed to “skewed” cropping pattern towards paddy and wheat on account of higher MSPs announced for these cereal crops every year and excessive focus by FCI on procurement of wheat & rice and neglect of other crops such as pulses, oilseed and coarse grains (out of the 22 crops for which government announces an MSP, it largely buys only five crops). Further, the procurement has largely been limited to a few states, primarily Punjab, Haryana, Madhya Pradesh, Andhara Pradesh with limited procurement in Bihar, Jharkhand, West Bengal and other north eastern states. Thus, government hasn’t been able to build a procurement operation which is decently spread across entire 22 crops and in all states.

Such monoculture has limited the ability of government to influence market prices of agricultural crops. The irony is that the MSP, which used to be the floor price (minimum price) over the years, has become the maximum price that a farmer is likely to earn on his produce with only farmers in Punjab and Haryana able to get a price equal to the MSP. Further, excessive focus on wheat and rice has not only resulted in soil degradation thereby making crops susceptible to pests and weed, but also, excessive cultivation of paddy have resulted in massive depletion of groundwater level in many areas specifically in the state of Punjab.

While the MSP policy did help the framers in their time, a fresh and stronger scheme is the need of the hour. In this light, NITI Aayog’s suggested “Price deficiency payment system (PDPS)” can be a good alternative to public procurement at MSP and may incentivise farmers to diversify beyond the conventional cereals of wheat and rice.  Under this, farmer would be paid subsidies (via Direct Benefit Transfer into their Aadhar accounts), if the price of his crop (market prices) slipped below the threshold price (MSPs) fixed by the government. Further, to substitute PDS, again, direct cash transfers into the bank accounts of beneficiaries can be made which can be used to buy grains directly from the open market. Presently, this solution has become more feasible with strengthening of JAM Trinity of Jan Dhan, Aadhar and Mobiles.

The PDPS can offer a good solution to multiple issues faced under conventional MSP system. The Price deficiency payment system will moderate the need for the government to actually procure, transport, store and distribute food crops; thereby reducing the wastage, corruption and inefficiencies involved in MSP led procurement and PDS system. In addition, it may be more effective than MSPs at ensuring that cropping patterns in India respond to consumer needs and comply with changing demand patterns. Further, DBT will not only eliminate “ghost beneficiaries” and ensure competitive pricing among the grocery stores but also enable people to buy better quality food of their choice from the open market and not just restricted to items sold in PDS, which are often inferior in quality. However, spending of the cash transfers on non- food items and sin goods like alcohol by the beneficiaries remains a grey area in providing true relief under DBT.

While counting the benefits of DBT, the recent migrant’s crisis can’t be ignored. DBT transfers can tide over the growing woes of migrants too, who are largely not covered under PDS. While extension of Pradhan Mantri Garib Kalyan Ann Yojana (PMGKY) till November 2020 to cover 80 crore individuals and government’s approval to the long pending demand of, “One nation, One ration card”, to provide immediate relief to stranded migrants to access PDS benefits across the country is a step in right direction; however, still a large migrant population remains uncovered under NFSA and PMGKY schemes. In this light, some monthly cash transfers under DBT scheme or minimum income guarantee scheme (MIGS) can prove to be a game changer, going forward.

However, the success of DBT will depend largely on extent of financial inclusion and banking habits among people. To this end, opening of new bank accounts in last 5 years under the Pradhan Mantri Jan Dhan Yojana (PMJDY) can help government to gradually move towards direct cash transfers, moving ahead.  Further, the success of PDPS will remain severely restricted unless comprehensive agriculture reforms are carried out. To this end, the three recent ordinances governing agricultural produce marketing, contract farming and an amendment to the Essential Commodities Act (ECA), is a step in right direction. To start with, the first ordinance related to agricultural marketing — The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020 or the FPTC Ordinance — to end the monopoly of the Agricultural Produce Market Committees (APMC) mandis and allow direct buying from farmer producer organizations (FPOs), is commendable. It will not only boost private mandis and create multiple channels for farmers to sell their produce directly to private sellers outside the designated APMC system but will also help in building an all-India market for agri-produce.

The other ordinance, “The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services (FAPAFS) Ordinance, 2020”, aims at encouraging contract farming. The ordinance provides a framework for farmers to enter into direct contracts with food processing companies and consumers; thus obviating the need of a licensed trader who generally exploit framers in order to increase their own margins. It is a forward-looking approach as farmers can lock in prices and buyers for their produce even before the harvest, rather than following current practise where farmers sowing decision are influenced by the last year’s price which often leads to the problem of a bumper crop. However, the issue of exploitation of innocent and ignorant framers by large corporate houses remains a concern by the farmer’s groups.

Lastly, the third ordinance on recent amendment to Essential Commodities Act, by assuring that stocking limits will not be imposed on the private sector, except under exceptional circumstances, will help in drive up investment in cold storage and modernization of the food supply chains.  However, the clause of ‘extraordinary price rise’ should be deleted if government really wants the private sector to invest in storage and distribution.

It is an established notion that no policy is perfect; every scheme has some flaws either in policy formulation or in its implementation. In this light, as agriculture is a “state” subject, central ordinances on APMC and contract farming will surely attract state’s opposition which consider it as an attack on the true spirit of federalism. However, willingness of the respective states to usher in agricultural reforms and “cooperative federalism” can go a long way in ameliorating farming distress and for realising the full potential of announced agricultural reforms.