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For example, if the state decides to set the legal PSM for paddy at 2,000 rupees/quintals and market prices are much lower than MSPs, private traders will refrain from buying the products, resulting in supply exceeding demand. When demand for the product decreases, the price of Paddy automatically collapses. Since buying at lower prices is prohibited by law, a buyer cannot buy at a lower price. For example, no more than 74% of total wheat production is placed on the market for sale. It is 90% in the case of rice. The number also varies for other crops. Therefore, the total purchase value of the 23 crops actually entering the market does not exceed Rs 7 lakh crore,” he added. Whatever the cost factor, public investment cannot be regarded as mere expenditure. It creates jobs, increases incomes and stimulates the economy. The industrial sector is too mechanized to accommodate the uprooted people of rural India. It is therefore of crucial importance that more and more people are not driven out of agriculture. The Prime Minister and the Minister of Agriculture have already assured Parliament that the MSP regime will continue, even though they reject any need for legal support. A policy paper by NITI Aayog agricultural economist Ramesh Chand, often quoted by Ministry of Agriculture officials, states: “Economic theory and experience show that the price level that is not supported by demand and supply cannot be maintained by legal means.” It suggests that states are free to guarantee PSM rates if they wish, but also provides two ineffective examples of such policies.
Of course, there is also no legal or legal support for this, and therefore farmers cannot legally qualify for PSM. If the government wants to, it can practically stop buying crops from the MSP tomorrow morning. The fact that he will not do such a thing is largely because there will be political consequences for the same. Legal MSP cannot function if it is not supported by demand and supply factors. At best, it can only work if retailers pay farmers prices below competitive market prices. Therefore, a legal MSP can work if the level of MSP is close to the open market price or the market authorization price. If the PSM is anchored in a fixed cost-plus formula that happens to be higher than the demand-driven price, private actors will have no incentive to buy farmers` products. Farmers receive less than PSM: In most crops grown in much of India, the prices farmers receive, especially during the harvest season, are well below officially declared PSM. And because PSM don`t have legal support, they can`t legally claim it. According to the WTO Agreement on Agriculture (Agreement on Agriculture), a developing country is not allowed to provide support for the aggregate measure (AMS) – an acronym for subsidies – exceeding 10% of the value of its agricultural production. AMS covers “product-specific” and “non-product-specific” subsidies, i.e. subsidies for agricultural inputs such as fertilizers, seeds, irrigation and electricity.
Chaudhary Birender Singh, a senior BJP leader and grandson of legendary agricultural leader Sir Chottu Ram, backed farmers` demand for legalised PSM, telling The Wire that India cannot achieve a $5 trillion economy by ignoring its farmers. He said that a few months ago, a farmer leader of the SKM also agreed that it was difficult for a government to buy every grain from the MSP. One is the sugar sector, where private mills are required to buy sugar cane from farmers at prices set by the government. With low sugar prices, high overstocks and low liquidity, factories failed to make full payments to farmers, resulting in an accumulation of thousands of crores of levies that had been unpaid for years. The other example is a 2018 amendment to the Maharashtra Act that punishes traders with heavy fines and jail time if they buy crops at lower prices than the MSP. “Because free market prices were below the state-cited (legalized) MSP levels, buyers withdrew from the market and farmers suffered,” the newspaper said, noting that the move was quickly abandoned. However, if the MSP is legalized, meaning that the center is committed to buying all farmers` products at that price, it will lend credibility to the U.S. position. This will lead to a scenario in which India`s subsidy could go well beyond 10%, resulting in a breach of our commitment under the WTO Agreement on Agriculture. But a law that makes PSM the legal minimum price defies economic logic. The government sets PSM for 23 crops, but it is only effective for rice and wheat because it only buys these two raw materials in sufficiently large quantities.
PSM are an assurance that the government will intervene if market rates fall below this threshold, which will help avoid fire sales. This policy has been beneficial when India has faced severe food shortages. Agricultural policy to deal with surpluses will have to be fundamentally different from measures taken to overcome an earlier period of scarcity. A law banning the purchase of the other 21 crops below the MSP by a private trader will also immediately lead to high inflation. Every one percentage point increase in PSM leads to a 15 basis point increase in inflation. Higher PSM could also upset the Reserve Bank of India`s inflation targets and hurt economic growth. A MSP mechanism that ignores global demand and prices leads to market distortions. If it is not profitable for traders to buy from PSM, the private sector will exit the markets.
In such a scenario, the government cannot be a monopoly buyer. Mandatory PSM will not make India`s agricultural exports competitive, as the prices guaranteed by the government are well above domestic and international market prices. The right of farmers to sell their products to whom, where, anytime and in any quantity must not be infringed. The elasticity of price transfer between CMPAs and producer prices is impressive. As a result, buyers outside of APMC must compete with APMC prices and vice versa to attract farmers` products. In addition to the existing horizontal inequality in public procurement between states, there is no guarantee for a farmer that his products will come from designated PSM. In reality, the MSP is only a fictitious target price for supply, below which agricultural products cannot be purchased, but most of the time, the purchase is made at a much lower price than the MSP. For these reasons, a system of payment of compensatory prices makes perfect sense. Of course, this means more spending for the central government, and it will have to find ways to finance it.
But it`s a much better way than securing PSM by sourcing all crops. A thing or two can be learned from Bihar, where markets managed by Agricultural Market Committees (APMCs) were abolished in 2006. Chintan Patel and I took a deep dive into this a few months ago. The point that turned out in the end was that a free market doesn`t necessarily work without the right structures. An average Bihari farmer was and is too small to cope with any system, whether public or private. “So the MSP is not a government Sop. This is the bare minimum to save the peasantry from devastation and misery. It is an insurance against the anarchy of the future,” said Sukhpal Singh. In fact, this volatility leads to what is known as the spider web effect. If the prices of a particular crop rise rapidly in one year, more crops will result in the following year. Next year, supply increases and prices collapse.
When prices fall, culture declines, causing prices to rise again in the coming year, hurting consumers. For explanatory reasons, I say this is somewhat simplified, but price fluctuations hurt everyone, not just farmers. Therefore, income support makes sense. It would be naïve to think that the government will buy every grain of what is left. The food subsidy bill is already unsustainable (over Rs 400,000 crore for 2020-21). We shudder when we imagine what the payment of the subsidy would be if we also bought (from the MSP) all the tonnage that is not collected by private traders. This will also have serious implications for India at the World Trade Organization (WTO). “The challenges of humanity cannot be solved by struggle. but through joint action”: PM says India`s G20 presidency will reflect its tradition of seeking harmony among all Nevertheless, rice paddies were one of Punjab`s most important crops in 2019-2020, when they barely grew legumes.
The irony is that Punjabis as a state don`t eat much rice, which explains the highly traded rice surplus the state has. But they eat a lot of legumes and almost do not produce any. The MSP is the minimum price a farmer must receive for his food grains, as guaranteed by the government. They are recommended by the Committee on Agricultural Costs and Prices (PFGB) and approved by the Cabinet Committee on Economic Affairs. Allowing buyers outside APMC-Mandis to enter the market promotes competition and terminates operations. While consumers currently pay a higher price, farmers still get lower prices due to inefficiencies and imperfections. Therefore, the right attitude of the markets through the new laws is crucial. UMP (Unified Market Platform in Karnataka), E-NAM, resulted in a 38% price increase.