Legal guarantee on MSP

Source: By Udit Misra: The Indian Express

The Prime Minister's surprise decision to withdraw the three contentious farm laws in November 2021 led to two diametrically opposite reactions.

One group saw this as the humiliation of a proud and malicious government, hell-bent on favoring its crony capitalists by enabling the looting of poor, defenseless farmers. The other group saw it as the success of a remarkably elaborate conspiracy in which a handful of miscreants — who pretended to be farmers but were, in reality, just vicious agents propped up by international and internal enemies of India — succeeded in upstaging the Indian PM. Neither of these extreme positions is justified.

This was, however, hardly surprising because, since the beginning, there has been no middle ground on this issue.

Indeed, the utter lack of any nuance and understanding of the opposing view is possibly the most unfortunate aspect of this whole sordid saga, which saw hundreds of farmers die while protesting. Such polarization almost guarantees more unfortunate episodes in the future.

For those who want to understand where the Indian farmer and Indian agriculture stand, please click on this piece. It explains, using official data, what ails Indian agriculture and why (see the chart).

TWO POSSIBILITIES

Now that the three laws are being withdrawn, one of two things — or both — can happen.

One, the farmers — unwilling to let go of their newfound political muscle and cognisant of their bargaining strength given the immediate electoral pressures facing the ruling BJP — may continue to protest and demand a new law guaranteeing payments made at the so-called Minimum Support Prices (MSPs) be enacted.

Two, the PM and the BJP government (which is the first government to enjoy a single-party majority in the past three decades), smarting from being forced to retreat, may decide to wait until the election season is over before either re-introducing the laws in the Parliament or introducing them at the state-level. It is crucial to note that even when he announced the withdrawal of the laws, the PM did not suggest that there was anything wrong with the laws or the way they were bulldozed.

Neither of these would be desirable developments.

Since, on 19 November 2021, farmers have already announced their decision to continue protesting until a new law guaranteeing MSP is enacted, let’s tackle this possibility today.

To begin with, some have questioned whether it is even possible for any government to pass such a law. But let’s ignore such speculation in deference to a popular slogan — Modi hai to mumkin hai — that extols the ability of the current PM to achieve whatever he sets his mind to.

The key policy question is: Presuming such a law can be passed, will an MSP guarantee solve India’s agrarian distress? The long answer is not only more interesting — it involves a crazy story — but also more illuminating than the short one.

THE STORY

In 1976, Jimmy Carter ran for the US presidency. Given that Carter came from a farming background and because the US farmers were facing a tough time, it was natural for him to focus on finding some kind of policy solution.

During the campaign trail, he stated: “Now, although I am a farmer, I’m not in favor of guaranteeing farmers a profit. But I am in favor of giving farmers an equal break.

One of the ways of providing such an “equal break”, suggested Carter, was to arbitrarily raise the price of milk by 6 cents per gallon. The move was aimed at improving the incomes of America’s dairy farmers.

As it happened, Carter defeated the incumbent President Gerald Ford, and, in 1977, the US Congress passed a new law which stipulated that the price of milk will go up by 6 cents every six months automatically. It seemed straightforward enough to imagine that just by raising the price of milk, the government could alleviate all distress among dairy farmers. But in reality, for higher prices to work, either the supply of milk had to fall or the demand for it had to go up.

Since asking the dairy farmers to cut back on supply would not make any sense if the goal was to make them profitable, the government decided that it will enter the market and raise the demand for milk by buying it up.

But then came another problem: Milk goes sour very quickly and the government did not have the wherewithal — tankers etc. — to store the huge quantities of milk that would need to be bought to keep the prices up.

The solution to this problem was also found. It was decided that instead of buying milk, the government should buy cheese. That’s because cheese would be easier to store and has a longer shelf life.

So here was the final design of the Carter intervention: the US government will announce a set price at which it will buy whatever quantity of cheese anyone wants to sell it. By buying more cheese, the government was going to boost the demand for milk and thus raise the price of milk and thereby improve the profitability of the dairy farmers. So far so good. The government seemed to have fixed the problem of dairy farmers being unremunerative.

As the weeks and months passed, more and more people bought milk to make cheese and sell it to the US government because that was a sure shot sale. By definition, the government could not deny buying cheese at the given rates.

But as the years rolled by, the government started running out of space to store all the cheese that it was purchasing. The situation became so dire that the US government had to rent several caves — yes, you heard it right — of the size of 120 football fields to store all the cheese that was being procured just to keep dairy farmers in business.

By 1981, when Carter’s tenure ended, the whole dairy support program was costing the US taxpayers $2 billion a year. And by this time, the US government had two pounds (roughly 1 kg) of cheese for every American. When a new administration took charge under Ronald Reagan, his officials declared that the 60 million bricks of cheese were a “national emergency”.

Part of the problem was that this cheese was deteriorating. An equally worrying problem was how to get rid of it. If the government tried to sell large quantities of this cheese in the market, it would have depressed the prices of cheese and hurt the interests of the cheese producers. If the government decided to give it away free, even that would ruin the cheese producers. The government could not have destroyed all the cheese nor could it just give it away outside the country as aid since cheese doesn’t travel well.

So it was decided that it would be given away to those sections of the society who otherwise were not rich enough to enter the cheese market. In other words, the poor and underprivileged were to be given huge bricks of government cheese. Thus began the big government cheese giveaway in the US and it carried on through the 1980s because there was so much of it. Soon the guaranteed/ automatic price increases for milk were stopped.

But that still did not stop the problem of people selling to the government inordinate amounts of cheese. If the government stopped that process of buying then it would again have ruined the dairy farmers, who, by now, were geared to produce more milk than was needed by the market. Eventually, the US government had to — and this is as ironic as it is crucial — pay the dairy farmers to stop producing as much milk.

Another way to cushion the blow was the creation of the National Dairy Board, which incentivised people to actually drink more milk directly, instead of the excess milk being routed to the government via the cheese. Those of you who want to hear about this story in greater detail, listen to an August 2018 episode of NPR Planet Money podcast (https://www.npr.org/transcripts/643471690) that details this fiasco in all its unbelievable hilarity.

THE ANSWER

What the whole US cheese episode shows us is that when governments arbitrarily fix prices in an economy, it can often have negative and unintended consequences, regardless of how well-intentioned the move was, to begin with. Often such price guarantees — like the MSP — can start off as a short-term solution to either boost production of a commodity or alleviate economic distress among one category of farmers. But, given the political economy, such decisions are rarely reversed and continue to remain in practice until they have devastating consequences, many of which are unforeseen.

Given the distress in Indian agriculture, it appears heartless to suggest that MSPs should not be given or, for that matter, MSPs should not be raised. But, as the example above shows, there are unintended consequences of undermining the market.

Clearly, regardless of whether protesting farmers succeed in getting an MSP guarantee from the government or not, here are three broad things one must remember when it comes to Indian agrarian distress:

MSPs are short-term palliatives; they are not a sustainable solution for all of Indian agriculture. Moreover, merely announcing MSPs is not enough. The government also has to procure goods at the said MSPs. India already has more than double the buffer stocks, which are often found rotting away. So, any plans to ramp up MSPs and procurements should also be mirrored by higher and better quality disbursals to the millions of poor. But, as a general rule, instead of arbitrarily fixing prices of goods in the market, the more effective way might be to provide direct income support to those who are poor — regardless of whether they are farmers or not.

The most important intervention — either by the government or otherwise — needed in Indian agriculture is to boost investments. That means better irrigation facilities, easier access to credit, timely access to power, creating lots of warehouses, and ramping up of extension services including post-harvest marketing. It is when such facilities are provided — either free or at an accessible price point — that the Indian farmer would be able to break the shackles that make him and her so vulnerable.

Lastly, as the data in the chart above showed, there are just too many people involved in Indian agriculture for it to be truly remunerative. To a great extent, the solution to the economic distress of Indian farmers lies outside agriculture. It lies in boosting India’s industrial and services sectors. These are the two sectors that can soak up the excess labor that is engaged at present in extremely unremunerative farm activities and provide them with well-paying jobs. It is only when industries and services sectors grow rapidly for the next couple of decades that India’s farm distress will get alleviated. At present, this has not been happening. As this piece explained, even before the Covid pandemic, India’s manufacturing sector lost half its jobs between 2016 and 2019. Equally worrisome is the trend that more and more people are now re-joining agriculture.