Is there an investment opportunity in PSP Projects shares?

Assured procurement by the government at MSP is required to lift low prices at harvest time and nudge farmers to grow the crops that the country needs in an environmentally sustainable manner and in those regions of the country where poverty is widespread. MSP has got a bad name because its purpose has been twisted to placate political constituencies, which is perhaps inevitable in democratic politics.

Self-sufficiency in Green Revolution crops — wheat and rice — would not have been possible without the government procuring these cereals at support prices. Thus reassured, farmers focussed on raising productivity and output, without worrying about the marketing aspect. In a way, it was open-ended contract farming.

MSP has been perverted in Punjab and Haryana by free or cheap power. That has allowed farmers to pump groundwater recklessly to grow common rice, a crop for which the states are not climatically suited. Punjab’s rice productivity is the highest in the country at 4,180 kg per hectare. According to a 2018 ICRIER-Nabard study it also produces the most amount of rice per thousand litres of water: 570 grams. But almost all of that water is from the ground and much of it is lost to evaporation. So the amount of rice it produces per thousand litres of irrigated water is 220 grams, compared to Jharkhand and Chhattisgarh’s 750 grams and 680 grams respectively.

Punjab’s eight lakh farmers sell wheat to the government at assured prices. They account for more than 80 percent of the state’s wheat growers, through their share is 3 percent nationally. In Haryana, nine lakh farmers sold wheat at MSP to the government in 2018-19, up from 4.7 lakh in 2016-17.

In the case of sugarcane, the central government declares a Fair and Remunerative Price (FRP). But states like UP, declare a higher State Advised Price (SAP). Assured purchase of cane by mills has made India the largest sugar producer in the country. But SAP has sapped the industry of vitality. Mills are unable to sell sugar and withhold cane payments to farmers. We now produce more than we need. This has created distortions in the market. To prevent excess supply from damping sugar prices, mills are now required to sell at a minimum threshold price. Our exports of sugar also invite WTO action from other sugar producers like Brazil and Australia.

The government has twisted MSP by declaring that it will be 50 percent more than the paid out cost of cultivation and the imputed value of family labour. Farmers, of course, must sell profitably. But the above formula puts no pressure on them to be efficient.

Earlier, the CACP which is the agency that determines MSP would take into account factors like world prices. The new rigid formula can make Indian agri-produce internationally uncompetitive.

Need a reset in MSP policy

The government must procure just as much as it needs to meet the requirements of consumers entitled to rationed grains plus a buffer for contingencies like Covid-19. It must procure equitably from many states and not from just a few. Rice procurement must factor in the use of irrigated water. This will result in more rice being procured from the eastern states which are wet and rainy and more suitable for rice cultivation. These are also states where poverty is endemic. Procurement will lift grain prices — and incomes in those regions. Studies have shown that growth in agriculture is much more poverty reducing that growth in manufacturing or services.

Reduced procurement of rice and wheat and procurement that factors in environmental sustainability will hit the farmers of Punjab and Haryana hard. If left unaddressed it will create large-scale social distress. MSP and procurement policy should be used to nudge them to grow ‘socially-useful’ crops like pulses and oilseeds which the government must procure. India imports 60 percent of its cooking oil; we need to produce more oilseeds domestically. In pulses the gap between demand and supply has narrowed. Bringing irrigated land under these crops will help raise output and reduce imports. These crops need less water. Their root systems also enrich the soil with atmospheric nitrogen. We currently import urea (which is 46 percent nitrogen) at a huge cost.

Assured procurement at MSP could also push the farmers of Punjab and Haryana to grow maize, which is used in animal, fish and poultry feed. As the country becomes more prosperous consumption of animal proteins will increase so maize cultivation will be aligned with consumers’ changing food habits.

The Chhattisgarh government says it will get farmers to shift from rice to millets with a combination of MSP and assured procurement. Millets are more nutritious than rice and wheat and have become fad foods for upwardly mobile health conscious people.

Government’s role 

Government intervention at MSP is needed to lift prices soon after harvest when new arrivals flood the market. But the intervention should be at the margin and not to displace private trade.

Agriculture is a volatile economic activity because of the vagaries of weather. Small and marginal farmers will need income support so that they don’t slide into endemic indebtedness and poverty. The alternative to MSP is direct income support – a cash payment per acre. This is not trade distorting like MSP is. The US and Europe subsidise their farmers in this manner. But no country that can afford to support its farmers leaves them unsupported.