Rice crops are illuminated at dawn in a paddy field (Photographer: Dario Pignatelli/Bloomberg)

Kharif MSP Hike To Benefit Farmers Only If Procurement Is Done Right

The increased minimum support price announced by the government can raise the autumn kharif harvest farm income by 10 percent, Bank of America Merrill Lynch said in a recent report.

But farmers will benefit only if the procurement is right, according to S Sivakumar, divisional chief executive of the agri business division at ITC Ltd., and PH Ravikumar, founding managing director and chief executive officer at National Commodity and Derivatives Exchange Ltd.

The government yesterday increased the minimum support prices for kharif crops, responding to concerns about distress in the country’s farm economy. The additional government spend of Rs 15,000 crore on account of the higher support price is intended to increase incomes and the purchasing power of farmers, said Union Home Minister Rajnath Singh at a press meet in New Delhi.

But states and the Centre may not be equipped or have the necessary resources to take the minimum support price to the ground, Ravikumar told BloombergQuint. “You have an entity like NABARD, which is present in all states; make them responsible for procurement of certain commodities.” Private sector players will have to be involved, he added.

Sivakumar agreed that the procurement outreach needs to be far larger. Multiple mechanisms will be discussed to expand the reach in the next few months, hopefully even before the kharif harvest, he said.

Also read: Minimum Support Price For Paddy Hiked By 13%

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How do you assess the effectiveness of this increase in MSPs across these crops?

S Sivakumar: It is a very smart balance between two different things. One is in terms of the crops that the country would like to promote more in terms of growing, balancing what will consume more or less water, what is more nutritious and the other dimensions. The amount of increase we have seen in pulses and nutri-cereals is much larger than what you have seen in case of paddy and to some extent in maize. Ultimately, when you raise MSPs, keeping the interests of farmer in mind, there is always a concern in terms of what will happen to consumer prices, price index inflation and so on.

The other side is there has been long known issues saying that you pay so much price for paddy and wheat and that you are consuming so much of water. So, there is a good balance—50 percent more than cost objective in one hand as well as what is it that we will like to increase a lot more. So, the paddy increase is far lower than the other crops. It is a good balance that has been achieved.

The MSP for paddy, Arhar and Urad are currently lower than the current wholesale price. So, how is this expected to work? How effective it is going to be in alleviating the farmer distress problem, which has occurred on account of lower prices?

PH Ravikumar: In my view, the MSP hike is one more element which is being put in place to solve the Agrarian distress. You need four elements to be in place—the MSP has to be announced prior to sowing of crops and should influence the decision of which crops to be sown. Second, the MSP should operate as an option. The farmer has right but not an obligation to sell it in MSP. Third, the procurement and physical handling infrastructure that will enable a farmer to sell on an exchange, sell directly to a retail chain or give it to a procurement agency. Finally, the agri-extension services.

We have got the options formally put in place by the Securities and Exchange Board of India through exchanges. We now have MSPs in place. But this has to be linked with the warehousing and logistical infrastructure. The state marketing missionaries and the Food Corporation of India procure various commodities in times of stress. I don’t think we are equipped to take this benefit to ground level. For example, you have MSPs in rice and wheat, operating entirely and only in five states in north. I would suggest a partnership—like bring in entities like Indian Farmers Fertiliser Cooperative Ltd. and Krishak Bharati Cooperative Ltd., bring in warehouse entities like Central Warehousing Corporation and National Collateral Management Services Ltd., bring in other ground level entities like micro-finance institutions.

Today, you are aware that banks have started owning micro-finance institutions and this are present at ground level. You have well-regulated and governed entities that can benefit small and marginal farmers. Almost 85 percent of land holding is with small and marginal farmers. Their surplus to benefit from MSPs is not substantial. Therefore, it needs a ground-level aggregator. Unless that aggregator is of impeccable quality, this benefit will not reach ground level. It will remain the same.

If MSP is supposed to bring in floor price of some sort, but if the government is not going to pick up the non-purchased crop, then how it is going to reach the last mile, irrespective of banks and MFIs play an important role or not, and what kind of role could they play?

Ravikumar: The last-mile plays the role because they are the ones who interact with the 85 percent of farmers—small are marginal. They are the ones who need the benefit. They need to be hand-held, briefed, educated and supported. The large farmers do not need the benefit.

What will banks and MFI do in absence of the procurement policy and how can they participate in procurement policy? So, what role do you expect from banks and MFIs in the context of MSPs and procurement?

Ravikumar: The small and marginal farmers’ surplus production available for procurement is not large and you need an aggregator on the ground, which is the role today ‘Aadhat’s’ (middlemen) are playing. The ‘Aadhat’ function is to be supplanted but somebody has to perform those functions. Those functions will have to be taken over by these institutions. They aggregate and partner warehousing institutions, ensure qualities of acceptable levels and they also work with the exchanges to convert MSP into an option.

What needs to be done on procurement angle for this MSP hike to be truly effective and translate in helping alleviate the farmer distress?

Sivakumar: There is no question that it needs to be far larger than outreach. Out of the three different options that the government was consulting among themselves in between Centre and states as well as the Centre, state and the private sector. The third option is not yet clear. The first two are one bit of an expansion of the conventional outreach that FCI and National Agricultural Cooperative Marketing Federation of India Ltd. have. The decentralisation in terms of procurement leaving it to states that what kind of mechanism they can play. Bihar has some good procurement over last two years under this policy.

The second is the Madhya Pradesh Bhavantar scheme where you will pay the price difference between whatever is prevailing in the market and directly remitted to farmer versus the MSP. It reduces the burden of creating the procurement infrastructure and where the outreach is not large enough. Both of these have been talked about in the MSP announcement.

But these two are not sufficient. You need to expand the reach even more. I don’t agree with Ravi that banks and MFIs as the nature of the work done in aggregating is different. They can certainly support and extend the credit, so that a farmer‘s ability to hold for few more days in case of looking for market price goes up. But for MSP, it has to be the conventional Aadhats (middlemen) who has the procurement network of agribusiness companies, the food processors, the retailers, who otherwise already handle it. So, multiple mechanisms are discussed and I am sure some of that will come to closure over the next few months, hopefully even before the kharif harvest comes into the market.

The most interesting option which I thought is that in any case what the market can participate and do, is to improve the efficiency from two angles. The price much later in the year is typically higher than the immediate harvest price. So, how you plough it back early in the harvest season, so the burden of the government reduces in the MSP difference.

The second is the inefficiency between the farmer and the consumer supply chain. Consumer always pays a higher price. Therefore, how do you pull it back again to the farmer level by improving the efficiency there. So, the players I talked about are the well-adjusted players and well equipped to do and can participate in some kind of reverse auction  of every single location as what kind of difference I can bid for MSP versus the potential market and not just the current market. This will harness the total market power in terms of how you reduce the burden of the difference in market and MSP.

It is a good interim solution before the derivative markets become deeper and wider. For many more commodities, we need to get the derivative market operating. Options are just about being launched in one commodity which has to be expanded. That is a long-term solution. So that farmer buys an option, transact in physical market with an option embedded, forward contract. Many of these facilities exist in long run. But this mechanism of involving in private trade in many different ways, particularly in reverse auction mechanism I think is interesting way.

Even otherwise simpler mechanism exists much like FCI and NAFED. The Bihar work was anybody could bid and based on these terms they can just be purchasing agents. That kind of model is in any case available. But the consultation process which was happening over the months was how do you get most optimal method to involve the private sector. I am sure in the next two-three months that will be sorted.

Can you think of solutions, whether it is a hybrid solution or any one approach that the government finally selects? What should that approach be judged on the basis of? This procurement process seems to be the biggest challenge in being able to determine whether this MSP hike is just a great headline or a big change for the agrarian economy.

Sivakumar: It is a big change from the perspective of signaling that farmer’s profit is important. But by itself it is not going to solve the issue because if it is just that, then consumer price could go haywire, farmers efficiency can have an implication, how do we reach out to all the farmers and the benefits are not restricted to the small percentage.

The issues are going to be there. Certainly, there are many things which needs to be happen simultaneously. Only then these benefit will accrue. It is one of the many things which has to get done. Not only from the angle of procuring but in order to deal with farmer productivity issues and value addition in term of many crops.

Vegetables are major challenges today which you can’t have MSP based procurement because of perishability. So, you need to look at food processing. So, there is no silver bullet to ensure that how farmers’ income go up.

What could be the touch point of the procurement policy to better understand whether there will be finally translate to ground gains?

Sivakumar: I guess wherever the price difference between the market and MSP exist in whichever crops and the farmers who are growing it, what part of those farmers will benefit from any of all those methods could be the single most parameter which one must look at. Market is already paying something which is above MSP.

It is not so much issue for an MSP. But for those crops and those farmers who don’t have access to higher market price, how many of them have reached in one or the other methods would be the single most parameter.

Is that center responsibility or center or state’s responsibility?

Sivakumar: Obviously center and states, as much of this distribution is getting decentralized and agriculture is a state subject and center supports the state with these funds. But to reach any sizeable number beyond what conventionally one has reached, I think it is not enough for just center and state to operate.

You need a significant amount of involvement from the private sector. The discussion should reach some amount of conclusion and private sector must get involved including numerous Aadhats who are equipped and able to handle this. Everybody involved in this sector would pitch in and that is only possible to reach a sizeable number, across other states in many of these crops because there is no network on part of central and state governments sufficient to reach the pulses and the nutria-cereals and even maize is below the market price. So, these would be crucial.

Paddy in some sense will get handled in large areas. Although paddy in some of the eastern and north eastern states will be a challenge. But I am sure state governments will be able to handle this given the larger food security act, and consumer distribution need in any case exist in government procurement.

But for other crops in a quick time if you have to do it by October and November when the crop is available in the market, I think one needs to get the private sector involve lot more.

What is your response on procurement?

Ravikumar: I don’t think state and center government are equipped or have the necessary resources to take the benefits MSP to the ground. Necessarily, the private sector or institutional sector players have to come. You have an entity like NABARD which is present in all states, make them responsible for procurement of certain commodities.

The second is, you need to keep data in place on the ground. You need mapping of small and marginal farmers, their land holdings and the crop they are growing and around those geographies where there is reasonable concentration of small and marginal farmers, get warehousing entities like CWC or National Collateral Management Ltd. or tier 2 state level private warehousing corporation to come and partner with banks and MFIs. I am not suggesting banks and MFIs should become warehouses. But there are entities which are available on ground.

Now, farmer’s producer societies are being formed as LLPs. They should be encouraged to play a role in this. MSP in itself will not achieve a benefit unless the procurement particularly from the larger number is gathered and graded. So, the grading infrastructure also has to go down. And this means capital has to flow in these areas. There needs to be some sort of support from policy to enable capital flow in these areas of infrastructure.

How will you characterize what we are seeing in rural economy? Do you believe income boosts are possible and demand is on upswing?

Ravikumar: Very much. I believe it from two perspectives. As the chairman of Bharat Financial Inclusion, the largest listed microfinance entity in the country, we have never seen demand as a problem. It is a question of our ability to reach and deliver.

The second is, we look at the demands of cycles and two wheelers. It is growing 30 percent plus annual CAGR. Power lines have been established in almost every village. Power availability will increase which will lead to demand for appliances. I think rural demand is still in nascent stages. Some consider it robust. I don’t think it is anywhere where the potential is. I would say consumer finance companies and FMCG companies which cater to this rural demand, for next three years will have a very good time.

But how do you explain the fact that almost every second or third month, we hear one more state announcing a farm loan waiver on account of this distress? If the economy doesn’t need it and if things are looking better, then why is politics playing to it?

Ravikumar: I think they are mired in the past. They don’t realise the ground realities. The ground has changed, and they are five years behind. Most important damage they are doing to the system is the credit repayment culture is being damaged, that I see is the biggest institution, particularly from microfinance.

Now, the credit bureaus have taken deep roots. Today, the borrowers in microfinance who initially used to default have started coming back to repay their loans because they know that once their name appears as a defaulter, they don’t get money from any other formal sector player. That is a very good development on ground, particularly around the poverty level and among the lower middle class. Rural demand is rising, and it is set to rise at a much faster pace with or without MSP.