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India taxes farmers, but MSPs are not the solution PDF Print E-mail
Friday, 06 July 2018 03:41
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Shobhana edit

Not allowing free imports means farmers don't get market prices, but hiking MSPs causes more distortions

 

Given how almost Rs 1.5 lakh crore has been disbursed by a clutch of states for farm loan waivers already this year, and the sharp jump in minimum support prices (MSP) announced by the Centre on Wednesday—52-97% higher than the A2+FL based-prices—it is clear farmers are in deep distress and that the political class is doing whatever it can to try and alleviate this. But these are costly ways to placate farmers—and keep them from financial ruin—and are, even in the short term, fiscally unsustainable. The better way to fix the terms of trade that are against agriculture would be to, among others, put in place a good export policy so that the larger demand from the world markets fetches farmers a better price. Similarly, while various state government policies hinder movement of farm produce from one state to another—so selling in higher-price markets gets difficult—another way to help farmers would be to reduce these artificial barriers; some states allow high middlemen commissions or even rigged markets, all of which lower the value the farmer gets.

An Icrier-OECD study shows farmers have not been getting the international price for their produce consistently over very long periods of time; this is not surprising because the government tends to ban exports or limit them, from time to time, to keep a lid on local prices. The Producer Support Estimate (PSE), which is essentially the measure of the difference between the price got locally and the international price, is negative for India—minus 6% over 2014-16 and minus 14% from 2000-2016. In fact, between 2014 and 2016, farmers in India earned prices that were lower than those in the world markets for 14 out of 20 commodities. Indeed, while a negative PSE means India is really taxing its farmers—and that is after accounting for various subsidies such as those on fertiliser that the government doles out—the OECD average PSE is over 15%, which means these countries subsidise their farmers in a big way.

 

Seen in this light, the sharp hike in MSP seems justified—the farmers are being taxed, so the government is doing the right thing by promising them more money. The problem, however, is that this is not sustainable. While the government did not put out numbers on how much of various crops it will procure, the cost is substantial; and if the higher MSP doesn’t result in a meaningful amount of procurement, it won’t help farmers. But MSPs, at the end of the day, distort both the cropping and consumption patterns, skewing them towards wheat and paddy because typically the government procures about 30% of the rice and wheat harvested. Similarly, when MSPs for cotton are hiked in the manner they were, India’s cotton becomes more costly than that globally, and that, in turn, causes a reduction in exports of cotton fibre as well as cotton textiles/garments. In which case, as cotton prices fall in the local market, farmers will need more and more government procurement to keep them afloat; in even the medium term, this is not sustainable, especially since, the greater the distortion, the greater the destruction of natural demand. A related issue that India’s trade negotiators need to work on relates to the WTO—India can’t have the huge taxation that Icrier-OECD talk of and also be subsidising its farmers in the way it is being accused of at the WTO. WTO rules need to be rewritten, but no developed nation is willing to discuss that.

 

Last Updated ( Friday, 06 July 2018 03:52 )
 

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