Abolishing FCI will lower cost of deficiency payments PDF Print E-mail
Thursday, 29 March 2018 04:10
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Niti Aayog estimates costs at Rs 69,574-111,318 cr and this falls dramatically if cash paid in lieu of procurement


Though the government has not, so far, given any estimates of what the Budget proposal for higher MSPs would cost, along with the plan to make this available for most major crops, according to a NITI Aayog paper, the costs of the scheme could vary between Rs 69,574 crore and Rs 111,318 crore depending on whether the market prices of various crops are lower than the MSP by 10% or 25%. As the paper points out, the actual difference between market prices and MSP can be much higher in some cases—33% for sunflower in Andhra Pradesh in crop year 2017-18 and 38% for arhar in Madhya Pradesh, for instance. This estimate of cost, though, is based on the government needing to make good the difference in market prices and MSPs for only 40% of the marketable surplus—the Budget, however, suggested this would be available for all the surplus crops. The reason why a lower figure has been chosen is because, as NITI says, “about 40% of marketable surplus is currently channelized through formal channels where it is eligible for recording of prices and arrivals”. In other words, even now, the scheme is primarily for the larger farmers.

What is more interesting, the NITI paper points out the costs can come down dramatically if, instead of FCI-led procurement, farmers were simply paid the difference between market price and the MSP that is announced from time to time. In the case where market prices are 25% less than the MSP, the costs can come down to Rs 75,140 crore versus Rs 111,318 crore in a procurement scenario. Given the inefficiency of the FCI system, the differences in cost are not unexpected. But, since agriculture markets are quite heavily cartelised, it is important that enough measures be taken to ensure market prices are not rigged—the big gap in prices across states, and even within a city, are testimony to how uncompetitive the markets are.

More worrying, apart from the impact on the fisc, is the impact on inflation. The NITI report estimates the two announcements—the higher MSP and a guarantee of its availability for all farmers—will lead to farm level prices rising by around 15% and will have “very strong implications for inflation and consumers”. The paper recommends this be reduced by making the supply chain more competitive, using better logistics, making markets more competitive and even linking MSP support “to satisfactory adoption of major provisions of the Model (APMC) Act”—that, more than anything else, should prove that the pan-India eNAM agriculture market is still in its infancy.

The NITI paper goes on to add, the “proportion of produce eligible for MSP support is going to increase over time … therefore it may be critical to implement measures for promoting agro-exports in the coming years … this will also create buoyancy in domestic markets”. In the case of cotton, where the price support is likely to be high, NITI underscores the problem of imperfect markets when it says, “if cotton market is kept competitive, financial burden of MSP implementation will reduce substantially”.

It must, of course, be pointed out that, had these reforms been successfully implemented all these years, the government wouldn’t even need to come out with its MSP-based deficiency payments system. Given how the proposed system is so fraught with problems, and is also quite limited in its scope – the bottom 60% of farmers will be left out of it for all practical purposes—why not just implement the area-based cash transfers being proposed by the Telangana government for all farmers? And, to begin with, scrap the FCI-based procurement system, a suggestion made three years ago by the Shanta Kumar committee.


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