Mains Paper 3: Economy
Prelims level: Minimum Support Price
Mains level: Issues related to direct and indirect farm subsidies and minimum support prices; Public Distribution System-objectives, functioning, limitations, revamping;
• For past three decades, a majors stapes taken to liberalizing Indian agriculture was that farmers were “net taxed”. Means “incomes of farmers were kept artificially lower” than what they should have been.
• It was argued that this “net taxation” existed because protectionist policies deprived farmers from higher international prices, and administered price system deprived farmers of higher domestic market prices.
• If there were more liberal domestic markets policy and freer, fare global trade, prices received by farmers would rise.
The net taxation of agriculture:
• The farm laws are necessary to end the net taxation of agriculture. For this purpose, data on Producer Support Estimate (PSE) are used.
• A recent study found that by Producer Support Estimate (PSE) in Indian agriculture was -6% (negative) between 2014-15 and 2016-17.
• For the developed country PSE was +18.2% in the Organisation for Economic Co-operation and Development (OECD) countries, +19.6% in the European Union countries and +9.5% in the U.S.
• The farm laws would weaken restrictive trade and marketing policies in India and “get the markets right”. This, in turn, would eliminate negative support and raise farmers’ prices.
Milk is Best Example of liberal domestic markets policy:
• There is no Minimum Support Price (MSP) in milk, and a substantial share of milk sales takes place through the private sector, including multinationals like Nestle and Hatsun.
• Yet, India’s milk sector is growing faster than the food grain sector. If the milk sector can grow without MSP and with private corporate, why cannot other agricultural commodities.
The Producer Support Estimate (PSE) and its estimation:
• The PSE is estimated using a methodology advocated by the OECD. The OECD defines the PSE as “the annual monetary value of gross transfers from consumers and taxpayers to agricultural producers, measured at the farm gate level, arising from policies that support agriculture”.
• In other word “PSE is an indicator of the annual gross transfers from consumers and taxpayers to agricultural producers, measured at the farm gate level, arising policy measures that support agriculture, regardless of their nature, objectives or impacts on farm production or income”.
• The PSE has two components. The first is market price support (MPS). MPS is that part of the gross transfers to producers arising from “a gap between domestic market prices and border prices of a specific agricultural commodity”.
• The second is budgetary transfers (BOT). BOT includes all budgetary expenditures on policies that support agricultural production. PSE is the sum of MPS and BOT, expressed also as a percentage of the value of agricultural production.
The PSE Estimation (means international prices were volatile):
• The PSE (The Producer Support Estimate) for Indian agriculture in 2019 was Rs. -1,62,740 crore, or -5.5% of the value of production. Within the PSE.
• The PSE for Indian agriculture was +1.9% in 2000. It fell to -14% in 2004, -20.4% in 2008 and -27.8% in 2013.
• Afterwards, it rose to -3.8% in 2015 and -5.5% in 2019. These fluctuating PSEs mean nothing in terms of taxation or subsidization of producers.
How MPS (market price support) calculated:
• The MPS was negative while BOT was positive. The MPS was Rs.-4, 61,804 crore, or -15.5% of the value of production. The BOT was Rs.+2, 99,064 crore, or +10.1% of the value of production.
• The MPS for a commodity is calculated as the product of its annual production and the difference between its international and domestic prices.
• The problem begins here: the international price is considered a benchmark with no reference to the actual possibilities of domestic producers obtaining that price.
The case of milk trade:
• The OECD estimates of MPS and PSE to show the perils of restrictive markets. By the same logic then, if the increasing penetration of private companies and the absence of MSP in milk are positive features, we should expect positive and rising MPS and PSE for milk.
• The milk had the highest negative MPS among India’s major agricultural commodities in 2019. The MPS for milk was Rs. (-)2, 17,527 crore, which accounted for about 47% of the total MPS in agriculture.
• The MPS for milk was (-) 37.5%. Thus, if we go by the OECD estimates, milk was one of the most heavily “taxed” agricultural commodities in India.
• The reason is that the OECD methodology, either for milk or for other commodities, does not offer any realistic assessment of the extent of taxation or subsidization.
The Question the methodology:
• The OECD numbers suggesting negative support, farmers, policymakers, and other stakeholders need to understand the pitfalls and limitations in the underlying methodology.
• The unpredictability in the inherent data, the total support can move from huge negative to huge positive.
• For India, the negative support as a percentage of the total value of agriculture production has substantially reduced in recent years.
• It is possible that support to Indian farmers in the near future becomes one of the highest in the world due to pitfalls in the OECD methodology.
• This might set alarm bells ringing, particularly in the developed countries, which may aggressively question India’s support measures.
The lack of logic in debates:
• The use of OECD estimates to (a) highlight the overall negative MPS for agriculture as a problem; (b) but conveniently remain silent on the negative MPS for milk;
• And lastly (c) argue in the same breath that milk producers have benefited from the growth of private firms. The absence of logic in this line of argument is nothing but appalling.
• In fact, what is missed in these debates is the elephant in the room: the BOT. The West’s PSEs in agriculture are positive and higher than India’s because they have higher BOT than in India.
• The MPS is a wrong measure of taxation in agriculture because the international price is no “true price” to be accepted as a benchmark. Further, a negative MPS, by itself, implies neither a government that squeezes revenues out of farmers nor the absence of absolute profitability in agriculture.
• By removing the link between support and farm production decisions, and investing instead in needed public services, governments can build an enabling environment in which farmers have the freedom to make business decisions in response to evolving market opportunities at home and abroad.
• “The beauty lies in the eye of the beholder”, the amount of subsidy depends on the methodology adopted for calculating it. Rather then it’s human value and rights.