Workers count Indian rupee bank notes at an APMC wholesale market in Jalandhar, Punjab. (Photographer: Dhiraj Singh/Bloomberg)

PM-AASHA Unlikely To Ensure MSP To All Farmers

BloombergQuintOpinion

After announcing a substantial hike in the minimum support price of several kharif crops of 2018, which will be harvested from late September-October, the government has finally come out with the Pradhan Mantri Annadata Aay Sanrakshan Abhiyan.

The program has three components –

  • a price support scheme,
  • a price deficiency payment scheme,
  • and a private procurement and stockist scheme.

There is no doubt that the farmers of some crops in a few states will benefit from the schemes announced by the government. However, it is unlikely that in the next three weeks, before the arrival of kharif crops, all the states will be able to put in place a mechanism to take full advantage of PM-AASHA.

Paddy, grown all across India, is the largest kharif crop, grown on about 37 million hectares. There is robust procurement infrastructure for paddy in Punjab, Haryana, Chhatisgarh, Odisha, Andhra Pradesh and parts of Uttar Pradesh.

However, Bihar, Jharkhand, West Bengal, and almost the entire North East are unlikely to procure a substantial quantity of paddy at MSP due to weak financial resources and infrastructure constraints of the organisations responsible for paddy procurement.

Since paddy is milled by the Food Corporation of India or agencies of state governments and the resultant rice is distributed through the public distribution system, the entire expenditure on procurement, handling, storage, movement, interest, losses etc. is borne by the Government of India as food subsidy. It is a different matter that arrears of food subsidy of FCI alone are likely to  reach Rs 1.40 lakh crore by the end of  FY19.

A farmer holds rice paddy at an APMC wholesale market in Jalandhar, Punjab. (Photographer: Dhiraj Singh/Bloomberg)
A farmer holds rice paddy at an APMC wholesale market in Jalandhar, Punjab. (Photographer: Dhiraj Singh/Bloomberg)

Price Support Scheme: Funding Mismatch

The price support scheme, a component of AASHA, is a four-decade-old scheme which is primarily implemented through the National Agricultural Cooperative Marketing Federation of India.

A state government has to notify which crops can be procured under PSS.

One of the conditions of PSS is that the procurement will be limited to 25 percent of production in a state and the state shall not charge any duty or taxes (like the mandi tax) on such procurement.

From FY13 to FY17, under PSS, Nafed procured copra, sunflower, groundnut, urad, tur, mustard, gram, sunflower, soybean, and moong. Due to depressed prices in open market, Nafed incurred losses on copra procured in 2012, groundnut and tur procured in kharif 2013 and gram procured in rabi 2013. These amounted to about Rs 1,083 crore as of September 2016. It took Nafed several years to get these losses reimbursed by the Government of India.

For PSS to succeed, it is important that any losses incurred by Nafed or other agencies are reimbursed expeditiously so that there is no shortage of working capital for procurement in the next season.

In FY18, the government enhanced the guarantee given to Nafed to Rs 29,000 crore for procurement of pulses and oil seeds under PSS. Under AASHA, the government will provide additional guarantee of Rs 16,550 crore which will be used by Nafed to raise working capital from banks. Thus, the total guarantee amounts to Rs 45,500 crore. Cumulative procurement of pulses from the kharif marketing season 2016 onward under PSS is about 48.68 lakh mt. Nafed is saddled with about 43.5 lakh tonnes of pulses, 5.8 lakh tonnes of ground-nut and 8.6 lakh tonnes of mustard, procured in FY17 and FY18.

The market prices of these commodities are still lower than the MSP at which Nafed procured it.

In the Ganj Basauda mandi in Vidisha district of Madhya Pradesh, urad traded at Rs 2,800 per quintal on Sept. 13, 2018, while last year’s MSP was Rs 5,400 and this year’s is Rs 5,600.

Nafed should be quickly selling the stock of chana procured in rabi this year to release working capital for kharif 2018. As the market prices for pulses and oil seeds are likely to remain lower than MSP, Nafed will require large funds for procurement and guarantee of Rs 16,550 crore may be inadequate for a large scale procurement.

If all the state governments were to actually notify all the pulses and oil seed crops under PSS, Nafed is surely going to fall short of working capital, storage capacity, and human resources.

While the current budget estimate for PSS in FY19 is only Rs 200 crore, the government has announced that it will enhance the budget allocation for interventions under AASHA to Rs 15,053 crore.

A woman sells pulses near a wholesale market in an old section of New Delhi. (Photographer: Amit Bhargava/Bloomberg News)
A woman sells pulses near a wholesale market in an old section of New Delhi. (Photographer: Amit Bhargava/Bloomberg News)

Also read: The Challenges Of Procurement At MSP

Price Deficiency Payments System: Learnings From Bhavanter

The government has restricted the price deficiency payments system to only oil seed crops of kharif. The guidelines of the scheme are yet to be issued but it is hoped that the government will plug the loopholes of similar scheme – the Bhavanter Bhugtan Yojana undertaken by Madhya Pradesh in FY18 under which eight crops, including pulses and oil seeds, were eligible for price deficiency payments. The PDPS provides an option to avoid physical procurement of a commodity and thus minimise the problems associated with handling, storage and disposal of a commodity. In a paper published in April 2018, we found that BBY is quite complex to implement on the ground and it provides an opportunity to unscrupulous traders to form cartel and depress market prices. Its first requirement is an effective mandi system and many states do not have it.

Farmers are required to register their area and produce on a portal. They have to sell their produce in mandis at prevailing prices. The MP government considered average productivity of the district to determine quantity eligible for BBY so farmers who achieved higher productivity were not compensated for entire production. The farmers receive difference between MSP and average sale price as a price deficiency payment. However, the ASP was calculated as weighed average of modal prices in mandis in MP and two adjoining states. An investigation by Scroll found several instances of serious manipulation by traders which depressed the mandi prices of soybean. The prices rose by a thousand rupees per quintal as soon as the period specified under BBY ended.

It seems that the union government realises the operational challenges of price deficiency payment scheme and that is why, it has been restricted to only oil seeds.

The kharif crop will arrive in the market from last week of September. In this short period, several states, especially in east India cannot capture details of farmers, crop and area cultivated.

Bihar, Jharkhand and Kerala do not have a mandi system at all.
Rickshaws and vehicles drive past a market in Patna, Bihar. (Photographer: Prashanth Vishwanathan/Bloomberg)
Rickshaws and vehicles drive past a market in Patna, Bihar. (Photographer: Prashanth Vishwanathan/Bloomberg)

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

In view these operational difficulties and the possibility of manipulation of markets by traders, it is unlikely that state government will opt for PDPS on a large scale in kharif 2018. They are likely to rather go in for PSS.

However, it must be acknowledged that if market reforms are undertaken in right earnest, and the fears around the Essential Commodities Act, export bans, stock limits, income tax raids etc are removed, PDPS can be a better option than physical procurement. Once the government sits over large stocks, private trade is reluctant to store the commodity for fear of liquidation of stock by government at cheaper rates. We are experiencing this situation in case of kharif pulses whose prices are lower than even last year’s MSP.

The Private Procurement Option

Out of three schemes which are part of AASHA, the most promising is the private procurement and stockist scheme for oil seeds, which is proposed to be undertaken on pilot basis in some districts.

The government has decided that this pilot will only be taken in a district where PSS or PDPS is not under operation. The guidelines of PPSS are yet to be issued and the government has only said that private agencies will be eligible for service charges up to 15 percent of MSP. If the prices do not rise beyond MSP, there is every possibility that private agencies may incur losses in these operations as the oilseeds procured by them will have to be sold in the open market in India.

It is not known if export of oil extracted from procured stock will be allowed because India is a large importer of edible oils. Moreover, there is no clarity on the extent of losses which will be reimbursed to private agencies if they have to sell the procured stock at a lower price. In the past, FCI and state agencies have engaged private companies for procurement of wheat and paddy from farmers at MSP. However, the process has not been smooth and the companies have taken years to get their expenses reimbursed by the government.

The problems of agricultural marketing are too complex to be solved by the government schemes which constitute AASHA.

One of the most important initiatives of Modi government was the creation of the e-NAM platform for creating a national market. The vested interests of commission agents in mandis and the elected leadership of APMCs ensured that e-NAM did not get implemented in its true spirit. The APMC fee generated in the states is used as discretionary fund by many chief ministers. As a result, the states have not shown any sense of urgency in freeing up agricultural markets.

The large variation in mandi prices across states shows that in addition to the global downturn in commodity markets and lingering impact of demonetisation, it is the broken agri-markets which are causing low prices rather than India becoming surplus agri-economy.

The experience of AASHA will hopefully convince the parties going for the Parliament elections in 2019 that there is no alternative to freeing up agricultural markets.

Siraj Hussain is Visiting Senior Fellow at ICRIER and was Agriculture Secretary, Government of India.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.