Remove India’s Government-mandated Minimum Prices for Agricultural Goods

By Afeena Ashfaque —

Working the fields in Bilaspur, India. Source: ILO in Asia and the Pacific’s flickr photostream, used under a creative commons license.

  • Status: In Progress – The Modi government has not yet been able to significantly reduce agricultural subsidies for the Minimum Support Price.
  • Difficulty: High  The ability to realize this reform has been complicated by efforts to fulfill the government’s goal of doubling farmers’ income by 2022.

This is the seventh installment in a series of articles on the Modi Reforms Scorecard by the staff and experts at the Wadhwani Chair in U.S.-India Policy. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and what impact such reforms could have on specific sectors or the economy at large.

India’s massive subsidy programs for agriculture are often highlighted as deterrents to agriculture innovation, as well as a drag on the national and states’ budgets. Removing these subsidies is politically difficult until farmers have alternative forms of employment. Yet the Indian government should generate the courage to limit the expansion of these subsidies as it tries to stimulate stronger growth in other parts of the economy. However, in its latest Union Budget for 2018, the Modi government has again increased, rather than reduced, India’s agricultural subsidies to its farmers.

India’s agricultural system faces many challenges, including increasingly small landholdings, poor transport infrastructure and decades of insufficient public investment. As such, the center and various state governments have nearly 200 programs and initiatives to support farmers, ranging from price stabilization to providing crop insurance, including its highest-profile program, the Minimum Support Price (MSP).

Since the 1970s, the government has used the MSP program to intervene in the market to insure agricultural producers against significant drops in farm prices, as well as ensure that food stays affordable for hundreds of millions of poor people. It does so by purchasing crops from farmers anytime the market price falls below the MSP price set by the government at the beginning of sowing season. However, the program barely reaches six percent of India’s farmers, as the government is often only able to buy rice and wheat in certain locations, leaving a majority of farmers out.

However, the inability of farmers to make a living has become a pressing political issue for the current government. Almost half of India’s labor force works in agriculture, and farmers have been increasingly mobilizing protests across the country demanding greater subsidy support. According to data from India’s National Crime Records Bureau (NCRB), farmer protests increased from 628 protests in 2014 to 4,837 in 2016, and have continued through 2018.

With elections scheduled for early 2019, the protesting farmers are calling on Prime Minister Narendra Modi to fulfil his party’s 2014 campaign pledge to double farmers’ incomes by 2022. In response to this mounting political pressure, the 2018 Union Budget called for $8.3 billion in increased spending on new agricultural subsidies to address farmers’ concerns.

Although farmers’ associations welcomed the increased spending on MSP subsidies, the program, as currently designed, is unlikely to provide enough help to farmers. Factors such as the increasing costs for inputs such as fuel, agrochemicals, and related agricultural rental costs remain unincorporated in the program. Moreover, most agricultural credit and crop insurance programs are used disproportionately by wealthier and more literate farmers, leaving the vast majority of farmers to the mercy of local moneylenders.

The MSP pricing system also influences farmers to plant only the listed crops, leading to overproduction. As prices fall in response to the higher supply, the government’s subsidy bill increases in order to make up the difference between falling market prices and the MSP price. Moreover, such overproduction is especially harmful to the over 90 percent of farmers who are still unable access MSP prices or government procurement agencies.

Although the government can influence the prices of rice and wheat due to its significant MSP purchases, it does not purchase enough of the other crops eligible for the MSP program, leading many farmers to often sell at below MSP prices. Such inefficiencies underscore why the government should abandon the MSP policy, and instead make direct payments to farmers for the difference between market and MSP prices.

The government’s subsidy programs have also not remedied the underlying problem in India’s agriculture – the lack of public investment in agriculture. From 1980 to 2014, agricultural subsidies have increased from 2.8 percent of agricultural gross domestic product (GDP) to 8 percent. In the same time period, India’s public investment in agriculture, as a percentage of agricultural GDP, has declined from 3.9 percent to 2.2 percent, depriving farmers of new agricultural technologies and information on better farming practices.

Despite these problems, the government has already planned to increase MSP prices rather than fix these underlying problems. In addition to the increased subsidy in the 2018 budget, the center has approved two further increases to the MSP prices for summer-sown and winter-sown crops. Such increased expenditure is also likely to lead to higher budget deficits and increased inflation, which is in conflict with the government’s target to keep its fiscal deficit at 3.3 percent of GDP –  a goal already under pressure from rising global oil prices.

India’s agricultural sector continues to face a series of systemic problems, such as poor infrastructure, limited land holdings, and a lack of public investment. However, given rising political pressure from farmers in recent years, the government has not addressed the longer-term, deep-seated problems in India’s agricultural system, and has instead increased subsidies for farmers, particularly through its MSP program. Given the problems of overproduction, lack of universality, and the scale of underlying complications, the government of India should limit the expansion of agriculture subsidies, and be ready to reduce them as other forms of employment grow.

Ms. Afeena Ashfaque is a Program Coordinator & Research Assistant with the Wadhwani Chair in U.S.-India Policy Studies at CSIS. Follow her on twitter @AfeenaAshfaque.


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