Less than 5.8% of farmers benefit from the minimum support price system


Towards the end of April, the Parliament’s Committee on agriculture made a rather bizarre commendation to the government. “The committee urged that steps should be taken to fix remunerative pricing with 50% profit margin over cost of production for all the 24 crops without any further delay as recommended by this committee,” the committee said.
What does mean? The committee has basically recommended that the government should ensure that the minimum support prices that it declares for various agricultural crops should give the farmers a profit of 50% over their cost of production. The government declares minimum support prices for 24 agriculture crops which include rice paddy, wheat, jawar, bajra, maize, ragi, pulses, oilseeds, copra, cotton, jute, sugarcane, and tobacco.
Even though it declares the minimum support price for 24 crops it primarily buys only rice and wheat from farmers through the Food Corporation of India(FCI) and other state procurement agencies.
Why do I say that the suggestion of the Parliament’s Committee on agriculture is bizarre? The answer to this question lies in the
Report of the High Level Committee on Reorienting the Role and Restructuring of Food Corporation of India (better known as the Shanta Kumar Committee Report). The report makes some interesting points using data from the 70th Round of NSSO (National Sample Survey Organisation) on The Key Indicators of Situation of Agricultural Households.
As per this survey there are 90.2 million agricultural households in India. From this, during the period July to December 2012, only 18.67 million households reported selling paddy. Of this number only 13.5% sold to a procurement agency (i.e. either FCI or other state procurement agencies). This essentially means that only 2.52 million households sold paddy to the procurement agency. Of this who sold to a procurement agency only 27% of their sales were at the minimum support price.
Between January and June 2013, 5.46 million households reported selling paddy. Of this only 10% or 0.55 million households sold to a procurement agency. And of those who sold to a procurement agency only 14% of their sales were at the minimum support price.
The situation is similar when it comes to wheat. As per the survey, between January and June 2013, 13 million households reported the sale of wheat, but only 16.2% reported to have sold wheat to a procurement agency. Of those who sold to a procurement agency, only 35% of their sales happened at the minimum support price.
So what does this mean? The total number of agricultural households who were able to sell rice paddy and wheat to the procurement agencies works out to 5.21 million. As the Shanta Kumar Committee Report points out: “The number of households comes to just 5.21 million (2.55 million paddy households during July-Dec 2012; 0.55 million paddy households during Jan-June, 2013; and 2.11 million wheat households during Jan-June 2013).”
The figure of 5.21 million forms 5.8% of the total number of agricultural households of 90.2 million. In fact, this number is also on the higher side once one takes into account the fact that there are households that sell both paddy and wheat to the procurement agencies. Further, as mentioned earlier not all wheat and paddy is being sold to procurement agencies at the minimum support price.
After taking these factors into account, the number of direct beneficiaries from the minimum support price announced by the government and the procurement system set up to buy paddy and wheat, comes out to be even lower than 5.8% of the agricultural households.
As the Shanta Kumar Committee Report puts it: “The direct benefits of procurement operations in wheat and rice, with which FCI is primarily entrusted, goes to a miniscule of agricultural households in the country.”
Further, the procurement benefits large farmers in a few selected states like Punjab, Haryana, Andhra Pradesh and lately from Madhya Pradesh and Chhattisgarh. Large farmers are the luckiest of the lot—they have a ready made customer in the form of the government for what they produce and they don’t need to pay any income tax either. What muddles the situation further is that in some states, the procurement agencies buy nearly 70-90% of the wheat and rice and literally crowd out the private sector.
This crowding out leads to food prices going up.
Food inflation hurts the poor the most. Half of the expenditure of an average Indian family is on food. In case of the poor it is 60% (NSSO 2011). What Rahul and the Congress party need to understand is that everyone associated with agriculture does not own land. As per the draft national land reforms policy which was released in July 2013, nearly 31% of all households in India were supposed to be landless. The NSSO defines landlessness as a situation where the area of the land owned is less than 0.002 hectares.
Any price rise, particularly a rise in food prices which is what an increase in MSP leads to, hurts this section of the population the most. Didn’t the Parliament committee on agriculture consider this, before making the recommendation that it did? If yes, why do they want to make things difficult for a major section of the population, by recommending what they have? Or are MPs too close to large farmers that benefit the most from rising minimum support prices?
The grain bought by the government is sold through the public distribution system (PDS). This grain is sold at extremely subsidized prices. Rice is sold at Rs 3 per kg and wheat is sold at Rs 2 per kg. The trouble is that the PDS is terribly leaky. As per NSSO 2011 the PDS leakage is 46.7%. This means that of every 100 kgs of grain distributed through the PDS, 46.7 kgs hits the open market. This is not surprising given the huge gap in prices between grain sold through the PDS and that sold in the open market. In fact, in some states the leakage is as high as 70-90%.
And this led the Shanta Kumar Committee to ask: “Given such large leakages, one must question the reasons behind this, and whether it is worth keeping FCI pouring grains into a system that fails to deliver.”
To conclude, the question to ask is—what is the point in keeping such a wasteful system going? The trouble is that its become too much of a holy cow for the government to do anything about.

The column originally appeared on The Daily Reckoning on May 12, 2015


About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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