Budget 2018 and MSPs
Source: Flickr, Aschevogel

This opinion piece was first published in Financial Express on 10 February as "Budget 2018: Higher MSPs are welcome, bring cheers to farmers​."

By P.K. Joshi, Director for South Asia, IFPRI

On expected lines, the budget aimed at strengthening agriculture and rural economy. Agriculture deserves serious attention as roughly half of the population is dependent on agriculture for food security and livelihood opportunities. During the last few months, we have witnessed farmers’ agitation in some of the states, and farmers’ distress was silently spreading across all the Indian states. This budget has very well packaged various provisions for making agriculture more efficient, sustainable and resilient. The key pillars to strengthen agriculture sector (improved technologies, appropriate policies, effective institutions and required infrastructure) are well reflected in the budget speech of the Finance Minister.

The most significant one is accepting the long pending demand of the farmers on minimum support prices (MSP), fixing 50 per cent higher than the production cost. This was one of the recommendations of the National Farmers’ Commission, and farmers were demanding for its implementation. This is now finally accepted and will be implemented from ensuing kharif season.  It is important because farmers rarely get the benefit of higher retail prices due to low farm harvest prices. Often traders collude around MSP and procure at much less prices than the retail by keeping a large share of higher prices. In a new regime, even if the traders collude, it will be at higher prices and will not be transmitted to retail as these prices are determined by supply and demand. Announcing higher MSP will cheer farmers as their long pending demand is met in this budget.

Announcing higher MSP is not enough unless it is procured at that price or make effective mechanisms to compensate farmers in the event of fall in farm harvest prices below MSP. In the past, farmers responded to government policies and programs which led to the record production of food grains, horticultural corps and milk. With exception of rice, wheat and sometime pulses, oilseed and potato, government is not procuring at MSP even if the farm harvest prices fell. We have witnessed in the past that in the absence of adequate mechanisms, the prices of majority of food commodities steeply fell and adversely affected farm incomes. This is contrary to the target of doubling farmers’ income by 2022.  It is welcoming that the Finance Minister has mandated the NITI Aayog to develop mechanisms to compensate farmers when prices fall below MSP. Recently, the government of Madhya Pradesh launched a new scheme, namely Bhavantar Bhugtan Yojana (price Deficit Financing Scheme) to hedge price risk of eight commodities. This scheme need to be replicated in other states to discourage farmers for distress sale and ensure MSP. Feasibility of other mechanisms, namely warehouse receipt, futures trading, and export/import, may be tried so that farmer is protected from price risks.

Another important part of the budget is developing 22 thousand Gramin Agricultural Markets, and linking them with e-NAM. At present, e-NAM is linked with the existing APMC markets. Farmers having no access to APMC markets are deprived of e-NAM benefits. The proposal of developing gramin markets will have far reaching implications, including farmers in remote areas will now have access to markets. In the past, developing agricultural markets were ignored that led our marketing system as inefficient and fragmented with long supply chains. The traders often exploit farmers in the absence of markets. Access to markets will benefit farmers, especially small and marginal, who have less marketable surplus and high transaction costs. They will realize better prices and their marketing costs will come down significantly. Developing gramin markets will also generate employment opportunities for rural youths and induce input markets, especially seed.

The budget has provision to strengthen farmer producer organizations and women self-help groups. Since Indian agriculture is dominated by smallholders, aggregating them is necessary to harness economies-of-scale in production, processing and marketing. FPOs and self-help groups need to be linked with the proposed new food parks for processing and marketing. This institutional innovation will (i) transform agriculture into agri-business profession, (ii) realize better prices due to collective bargaining power, (iii) promote agro-processing, and (iv) generate employment opportunities for youth in rural areas. It is welcoming that the FPOs established on the pattern of cooperatives and having transactions less than ₹ 100 crore, will now be exempted from income tax. This is a big relief to the existing FPOs and an encouragement for many start-ups to promote FPOs for production, processing and marketing.

Financing agriculture is of paramount significance to adopt improved technologies, make provision for irrigation, and go for farm mechanization. Provision for agricultural credit has gone up from ₹ 10 lakh crore to ₹ 11 lakh crore. Now fisheries and dairy farmers can also avail the benefits of Kisan Credit Card. This will further boost the dairy and fisheries sectors. In addition, aquaculture development fund and animal husbandry development fund have been created. All these will promote these sectors and increase incomes of farmers and generate employment opportunities.

The budget has further strengthened the Prime Minister Irrigation Scheme by allocating ₹ 2600 crores for groundwater development in 96 most deprived districts for assured irrigation. This will build resilience to agriculture by reducing production risks due to droughts. Studies have clearly shown that groundwater development helps in accelerating agricultural growth, increasing farm incomes and reducing poverty, especially in low income and deprived regions.

Overall, the budget is pro-agriculture, which must cheer farmers, especially small and marginal farmers.

Photo credit:Flickr, Aschevogel