MSP Debate May Have Little Impact On India’s Macroeconomics

Three bills—The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill; The Farmers Produce Trade and Commerce (Promotion and Facilitation) Bill; and The Farm Services Bill—were passed by Parliament last week.

The revised legislations, intended to liberalise the agricultural sector, have left unanswered questions over the permanency and role of minimum support prices. For now, the government had promised that procurement from mandis would continue at MSP.

How important is the MSP mechanism to the broader economy?

A BloombergQuint analysis shows that the correlation of annual changes in MSP with the gross value added of the agricultural sector and food inflation index is weak. Economists say that the changes being introduced will have little bearing on growth, although some change in inflation dynamics can’t be ruled out.

MSP And Agricultural GVA

According to BloombergQuint’s calculations, the correlation between growth in agricultural GVA in nominal terms and the rise in MSP between FY12 and FY20, was weak at -0.1%.

The correlation coefficient indicates the strength of the relationship between both variables and ranges from -1 to 1. A co-efficient closer to 1 or -1 reflects a strong positive and negative correlation respectively. A lower number shows a weaker correlation.

The scatterplot below is used to graphically represent this correlation. A linear pattern reflects a strong correlation while scattered data points suggest a weaker link between the two variables.

The correlation between MSP and the nominal agricultural GVA is now quite weak and very limited, said agricultural economist Abhijit Sen, adding that other variables, such as weather for instance, show a far stronger correlation with agricultural GVA.

MSP And Food Inflation

The correlation between MSP increases and food inflation as measured by the consumer food price index showed a weak correlation at 0.1% for the same duration.

Madan Sabnavis, chief economist at Care Ratings, explained that the correlation between MSP and agricultural GVA or food inflation, is not a ‘tenable relation’ because except for certain grades of agricultural commodities, procurement of other agricultural commodities is limited.

Conceptually, MSP is supposed to be the minimum price that the government pays when farmers are unable to sell their produce in open markets. But when market prices are low, the farmer can’t find a buyer and the government doesn’t procure the commodity, MSP at best serves as an indicative benchmark, Sabnavis said.

Of the 23 crops that the government announces an MSP for, procurement largely happens for two crops, said Vikas Rawal, professor at the Centre for Economic Studies and Planning at Jawaharlal National University. As such, MSP is irrelevant for the remaining and they continue to be sold at lower prices, he said.

MSP And Farm Community

Committees over the years have also pointed to the limited proportion of farmers who benefit from the MSP process.

The NSSO 2012-13 survey showed that of all the paddy farmers who reported sale of paddy during July-December 2012, only 13.5% sold it to any procurement agency, said a 2015 high level committee re-examining the role of FCI. In the case of wheat farmers, this share was 16.2%.

“Together, they account for only 6% of total farmers in the country, who have gained from selling wheat and paddy directly to any procurement agency,” this committee found.

Impact Of Bills

The three farm bills are all different in nature, said Sabnavis.

The impact of permitting open market sales on GVA is “likely nil,” he said. For any impact, the bill would have to take off in a big way and most farmers would have to choose to sell their produce outside the APMC markets. If that happens, there could be some fall in prices in some geographies, because of fewer middlemen, said Sabnavis. However, it remains to be seen if that will happen, as often middlemen also offer several added services in the form of greater market access or access to credit.

The decision to allow contract farming could be a win-win for both the seller and the buyer, as it would help cut intermediary costs, said Sabnavis.

Rawal, however, believed the inflation impact of the changes proposed could be more material.

Taking the example of the recent volatility in onion prices, Rawal said the spike in costs had to do with how stocks are managed and held. After the farm bills, a few large players could push up prices. As such, the volatility in prices could impact both, consumers and producers, Rawal said.