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Guarantee for MSP, New Market for Trading: The Way Forward When Farm Bills Come Into Effect

Farmers block a railway track as they participate in 'Rail Roko Andolan' during a protest against the farm bills near Amritsar on Thursday, Sept. 24, 2020.

Farmers block a railway track as they participate in 'Rail Roko Andolan' during a protest against the farm bills near Amritsar on Thursday, Sept. 24, 2020.

Even as policy practitioners strongly believe that India needs to do away with the MSP, it cannot be removed. Perhaps, the low hanging fruit here is to provide a guarantee for the MSP.

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Rachit Seth

What can be done to assuage the fear of farmers with regards to the farm bills? Policymakers and columnists have reflected on the undemocratic manner in which the two farm bills were passed in the Rajya Sabha, but very few have reflected on what is the way forward if these bills are implemented.

As argued in an earlier column here by me, there is no doubt that the agricultural sector needs to be freed in the true sense. We need, not just the removal of ‘Price & Trade Control’ wherein farmers can trade freely in an open market but also the removal of ‘Capital Control’ in the form of restrictive ownership, lease and tenancy laws, and doing away with the ‘Input Control’ by de-regulating the prices of fertilisers, seeds, subsidy on water and power. All this could have been done had the country’s economy was not reeling under the triple assaults of – demonetisation, flawed GST (yes, there is GST on many farm equipment and allied parts) and the current COVID-19 pandemic. The need of the hour is to provide direct income transfer to as many small and marginal farmers as possible.

The critics may argue that better agricultural growth in the first quarter indicates the sector was not hit by the pandemic, and the angst of the farmers is simply misplaced. They are wrong. First, the growth was driven largely by a bumper rabi harvest and strong procurement by the government for food grain distribution, but there was hardly any increase in farm incomes. April was the month when the lockdown was partially lifted, but despite muted harvest festivals, farm labourers and farmers alike did not return to their fields. Just to refresh the memory, videos on social media of farmers dumping produce, unable to sell their produce had also emerged around that time.

Second, it is being pointed out that the institutional infrastructure was already being built during this phase before the farm reforms ordinances were promulgated in June. This is wrong as there was absolutely no stakeholder consultation with farm bodies or leaders for these reforms. Rather, it was conveniently assumed by the government that since the reforms have been in the policy debate space since decades now, it does not require a fresh stakeholder consultation.

Now that the government has bit the bullet and put a Parliamentary stamp (through a voice vote, of course!) to these bills, there is an urgent need to win the confidence of the primary stakeholder — the farmer. A slew of measures can be adopted before implementation.

Even as policy practitioners in the field strongly believe that India needs to do away with the Minimum Support Price (MSP), it cannot be removed. Perhaps, the low hanging fruit here is to provide a guarantee for the MSP. The government has done lip-service to that, leading to farmer’s protesting. A ruling dispensation, which promised Cost +50 per cent MSP to the farmers and opposed the same in the Supreme Court, has very little credibility left. In the hearts and minds of farmers, especially from Haryana, Punjab, Western Uttar Pradesh and Madhya Pradesh, a statutory guarantee of MSP through robust regulations is the need of the hour. If the government can regulate the price of essential medicines through a body, what stops it to ensure the MSP.

The answer to the issue of MSP may again be two-pronged. A macro-institutional structure needs to be formed on a priority basis. If the policy makers are serious about hammering out a solution in a limited period, then it is proposed that an ‘Implementing Agency’ in the form of an Agriculture Reforms Council — Consisting of Agriculture and Finance Ministers of all states on the lines of the GST Council should be established at the earliest. This would reduce the time for a solution to take effect.

The second solution is part of history.

In 2012, the Union Cabinet cleared The Forward Contracts (Regulation) Amendment Bill, 2010, which permitted and regulated a financial instrument which enables buyers and sellers of commodities to effectively manage risk from price fluctuations and opened the door for the introduction of new intangible products like options in the commodities futures market. Unfortunately, the bill lapsed in the Parliament.

A Market for Futures (Forward) Trading of Agricultural Commodities needs to be developed. This would enable the procurement of excess production by both government and private sector alike. It will transform the MSP regime from a ‘committed liability’ of the government to its ‘contingent liabilities’.

This shifts the risk of the government to the more capable commodity markets. Under this regime, the government procures the strategic requirement at MSP and the purchases above this strategic requirement can be conducted by selling ‘put options’ to the farmers. If the prices of the commodity fall below the MSP (reflecting strike price in commodity options), farmers or option buyers will sell their produce to government procuring agencies such as FCI at MSP only. But if the market price is above the MSP, farmers will choose to sell directly in the open market and the only loss will be the premium paid by the farmers which can be subsidised by the government through Direct Benefits Transfers.

Disclaimer:The author is a student of Public Policy at the Takshashila Institute, Bangalore. Views are personal.


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