Wheat Pricing: Withdrawing "Support" from MSP

Maharashtra Government's Subversion of Monopoly Cotton Procurement Scheme

•  In 2002, it allowed private traders to procure cotton.

•  State procurement was 153 lakh quintals in 2001-02. It was reduced to mere 3,200 quintals in 2003-04. Within a short period, 8000-9000 private coton traders have cropped up in Maharashtra . Traders buy cotton from the farmers and then sell it to the Maharshtra State Cooperative Cotton Marketing Federation “and make money by manipulating both the grade and the weight of cotton” (World bank report 2002).

•  The presence of intermediate traders is a violation of the Monopoly Act and this offence is punishable with imprisonment and/or fine. Yet, this group has become a major rent seeker in recent years (Valluri Committee Report, 2000).

•  In 2003-04, the Maharshtra State Cooperative Cotton Marketing Federation cut the staff size down by 4,000 to 875 personnel.

•  The Federation sold cotton to millowners at rates cheaper than the purchase price and exported coton at prices lower than the domestic market prices and purchase price and accumulated a loss of Rs.3,000 crore. It was a deliberate conspiracy to wind up the scheme.

•  Simultaneously, the Centre slashed duties on cotton imports and there was massive import of cotton from the US subsidised heavily by the US government to the tune of billions of dollars.

•  The procurement price of cotton was slashed by Rs.500. Cotton farmers' payments were delayed by more than a year.

•  Both the Shiv Sena-BJP Government and the Congress-NCP Government have raised the state's total debt to more than Rs.1,15,000 crore by 2006.

•  The procurement price was less than the cost per acre. Monsanto's Bt Cotton seeds cost 12 times more than ordinary seeds but miserably failed to increase yield.

•  Within eight months the free power to farmers scheme was scrapped betrying the key election promise. Farmers having 23.35 lakh pumsets in Maharashtra each lost above Rs.3,500 per year.

• Lakhs of farmers converted to cotton cultivation as food grains production in the state averages just 103 kg per hectare compared to Punjab 's 1,032 kg. Now the number of cotton grower has reached 32,00,000. Due to the policies of the Congress-NCP Government all of them have come to grief. Vidarbha suicides are only an extreme manifestation of this. Maharashtra CM Vilasrao Deshmukh commented in a press conference, “There are always suicides, so what”.

Despite a normal monsoon last year, the announcement to import five lakh tonnes of wheat from Australia took the country by surprise because during the time of this announcement, the production estimates were around 740 lakh tonnes while consumption was expected to be around 720 lakh tonnes. Immediately afterwards, the government announced a Minimum Support Price for wheat that was much lower than the prevailing open market price, thereby egging farmers to sell their produce to traders. By reducing domestic procurement and faced with a depleted buffer stock, the government was able to justify these imports.

This depletion of buffer stock has not been due to lower levels of production, but because of a series of domestic reforms carried out by the government. By amending the Essential Commodities Act restrictions on stocking and transportation have been removed and the revised Agriculture Produce Marketing Committee Act has enabled farmers to sell directly to the millers. Commodity trading in futures' markets where traders speculate on prices without actually taking delivery of stocks has also contributed to this crisis. Further, between 2000 and 2004, the country exported 110 lakh tonnes of wheat. These factors have been responsible for the steady decline of buffer stocks over time.

In order to maintain a buffer stock of food-grains, stabilize market prices and insulate farmers against price volatility, a very important role is played by two institutions - the Food Corporation of India (FCI) and Commission for Agricultural Costs and Prices (CACP). Based on the advice of the CACP, the government announces the minimum support price (MSP) every year. The FCI in turn procures food-grain at MSP from mandis and stores and transports it across the country to meet the requirement of food-for-works programmes and the Public Distribution System. If the market price falls below the MSP, the government is under obligation to procure the produce offered for sale at the guaranteed price.

The critical role played by these two institutions has been severely undermined by wheat imports and low MSP. The ill-timed announcement to import was construed as a signal of an impending shortage and drove up prices across the country. In January, the open market price of wheat was around Rs. 1,000 per quintal and traders and companies were busy booking their supplies from farmers. Despite a higher prevailing market price, the government announced a much lower MSP of Rs. 650 per quintal, which is merely Rs. 30 more than what was offered in 2002. Again, traders, millers and companies were busy procuring wheat at substantially higher prices across the wheat belt of North India . The government belatedly offered a Rs. 50 per quintal bonus at a time when the peak procurement season was already over and also followed this with an announcement of a further 30 lakh tonnes of wheat imports. No wonder the FCI has been unable to meet the procurement target as most

World Bank Diktats to Maharashtra Government

The World Bank came out with a blueprint for ‘reforming' the economy of Maharashtra titled “ Maharashtra: Reorienting Government to Fecilitate Growth and Eradicate Poverty ” in 2002. The Congress-NCP Government in Maharshtra has been obeying the World Bank diktats. The recent spate of farmers' suicides in the state is a direct result of the World Bank's deadly prescriptions. Below we quote from the World Bank report.

•  “It is difficult to think of any valid economic reason for the state to intervene in the cotton market in an open-ended fashion. If anything, it distorts the pattern of crop production in favor of the protected crop.” (p.90)

•  “It is the view of this report that the Cotton Monopoly scheme has outlived its original objectives”. (p.90)

•  “The monopoly procurement scheme be discontinued from 2002 and the Maharshtra State Cooperative Cotton Marketing Federation be disbanded”. (p.90)

•  Instead of having government involvement in purchase, processing and storage of cotton, steps could be taken to increase adoption of high yielding seed varieties (Read Monsanto seeds) produced specifically for dry-land areas. (p.90)

•  “Though the canal water charge for sugarcane is now the highest in the country at Rs. 4,673 per hectare, if adequately collected, it would significantly change the incentives for sugar cultivation in canal command areas”. (p.93)

•  “A big challenge is to reduce power subsidies for groundwater irrigation. While the water user charges have been raised recently to cover full O&M costs, the recovery rate continues to be very low”. (p.94)

•  “A big portion of the MSEB losses are due to farm subsidies”. (p.94)

•  “Enrollment in the Employment Guarantee Scheme (EGS) has been falling. T he EGS seems have run out of steam in recent years. Keeping the EGS wage below the average agricultural wage is important to maintain the targeting efficacy of the program”. (p.108)

•  “Extending primary health care services to underserved areas would not cost much on balance if all primary services were subject to fees covering marginal costs. There is less justification for subsidies for low cost care”. (p.107)

of the grain has been cornered by private players. By announcing a lower MSP, the government has made a case for procuring less from the domestic market and importing wheat to make up for the deficit.

At the outset, this appears to be a win-win situation for all the stakeholders. The farmers received a higher price than the MSP offered by the government. The private sector has adequate stocks for its processing requirements and also to make speculative gains in future. With lower domestic procurement, the FCI has reduced its food subsidy bill, and the government, in turn, can replenish its buffer stock through imports. However, the future is not as bright as it appears on the surface.

The country needs to maintain a buffer stock of 84 lakh tonnes of wheat in January and 40 lakh tonnes in April. The FCI has a target of procuring 162 lakh tonnes this year. With aim to procure more than one-fifth of the country's production, the FCI was expected be the dominant player in determining the prevailing market price. However, since the FCI will not pay more than the MSP, the role of price fixation has been usurped by private players. In Punjab and Haryana, for instance, traders are offering Rs. 750 to Rs. 800 for every quintal of wheat and most of the stock has been bought over by companies like ITC, Cargill, Reliance and Adani. Millers from South India have cornered much of the produce in the states of Madhya Pradesh, Uttar Pradesh and Gujarat , the other major wheat producing states.

The misleading signal of an impending shortage has also affected commodity markets. Rampant speculation is taking place in futures' trading in the commodity markets which is also driving up prices. In Punjab , a future-price for wheat ranging from Rs. 750 to Rs. 900 per quintal has been fixed with the condition that traders will lift stock from farmers in November. As per the relays emerging from the commodity exchange, wheat price for July delivery is around Rs. 950 per quintal while from August onwards it is as high as Rs. 1,000 per quintal. Not surprisingly, farmers are unwilling to sell their stocks at MSP to the FCI, which will miss the procurement target by a wide margin.

While the move to sell wheat to private players at higher has benefited the farmers this year, it is a short term phenomenon. This is because the prevailing market price is imperfect as it has not been determined by demand and supply parameters but by the MSP, which serves as a benchmark for open market prices. While a lower MSP should have translated to a lower market price, the fear of shortage drove traders to resort to storage and speculation in futures' market. Further, higher prices in future are also unlikely in view of the government's intention to de-canalize and allow private traders to import wheat. While such imports may not be entirely duty-free, they would attract much lower tariff than applied rates. This is bound to lead to price depression as international wheat prices are much lower than the prevailing rates in India owing to the massive subsidies doled out by the OECD countries. Therefore the present euphoria among farmers about higher prices is misplaced.

With lower buffer stocks, the allocation for food-for-work and the Public Distribution System will naturally be scaled down. Last year, the food-grain component under the Sampoorna Gramin Rozgaar Yojana (SGRY) was slashed from five kilograms to three. With the government adamant to bring down the food subsidy bill, the allocations in subsequent years will be further reduced.

– Bhaskar Goswami