How can Narendra Modi government solve farm dissent? Roping in private sector could be solution; here’s why
Financial
Express
Reuters March 26, 2018
The Maharashtra government
conceded to the demands of the farmers, with the key demand being that of a
loan waiver—promised to farmers before the last state assembly elections.
The
protest of Maharashtra farmers, who marched in thousands, has been followed by
a mass sit-in in Rajasthan. There have also been reports of Uttar Pradesh
farmers being mobilised to stand up for their demands. Clearly, there is disillusionment
in the farm community with the current system. Depressed agricultural prices
have strained farm incomes. Farmers are facing distress in large parts of the
country, paradoxically, despite good harvests in the last two years. Some of
the demands made by farmers, such as enhanced minimum support price, are in
line with the promise already made by the government. The announcement by the
government , to increase the MSP of crops to 1.5 times the cost of production,
is yet to be backed by any sound implementation frame-work. The procurement
drives for crops other than wheat and paddy have failed to bring about any
significant change in the condition of the farmers.
The
Maharashtra government conceded to the demands of the farmers, with the key
demand being that of a loan waiver—promised to farmers before the last state
assembly elections. Loan waivers have, at best, served as a palliative, and
have definitely not provided any tangible relief; besides, they always set a
bad precedent. In any case, such schemes are not sustainable as they drain
state finances apart from worsening credit-discipline among farmers, impacting
lending patterns of banks and crowding out private borrowers. Continued farm
distress exposes the incapacity of the government schemes being undertaken in
providing remunerative prices to farmers, despite the agricultural sector being
a major focus of the existing government’s policy-making. What, then, can be
the way forward for government schemes, one that will give remunerative prices
to producers and provide at least some direction to the promise of doubling
farmers’ income?
First,
the price deficit financing scheme—the Bhavantar scheme of Madhya Pradesh
(MP)—needs to be tweaked to plug the current loopholes so that it can be implemented
on a wider scale. Under the Bhavantar scheme, the state government has promised
to transfer the difference between the MSP and the average market price to the
farmers’ bank accounts. On the face of it, the scheme if implemented properly,
should be immensely popular with farmers as it would provide immediate cash
compensation to farmers. It would also obviate the need for the government to
itself procure, eliminate the high costs of procurement, handling, storage and
disposal of the commodities. If implemented well, it should also not distort
cropping patterns as has happened due to selective implementation of the MSP
scheme—just for rice and wheat. However, the Bhavantar scheme cannot be
replicated in other states in its existing avatar due to multiple loopholes.
These
loopholes include: a) collusion between traders and farmers to show lower sale
price, to inflate the differentials and make illegal gains, b) the possibility
of recycling of stocks since there is inadequate control on procured stocks,
and c) sale of stock below fair average quality as there is no grading and
assaying, creating needless burden on the exchequer. Since the scheme is
open-ended, the financial burden of the scheme would be huge and unsustainable.
To address these issues, the scheme should be undertaken under a restricted
model in which procurement season should be short, preferably not exceeding 45
days. The stocks should be delivered only in empanelled warehouses to avail of
the price differential compensation. Procured stocks should remain in storage
till the conclusion of the procurement season. Stocks should be subject to
third party independent audit to confirm both quality as well as quantity.
Additionally, the relevant mandi prices used to calculate the price differential
should be the weighted average price of the previous fortnight in the principal
mandis of the state.
Second,
the farmer-income ‘safety net’ cannot solely rely on government agencies
because of huge financial implications as well as logistical challenges. Thus,
there is an urgent need to engage credible private sector agencies in the price
support mechanism for agri-commodities.
One
of the models to engage the private sector is to establish their role post the
procurement at MSP by the government since government agencies have had limited
experience in storing and handling commodities other than wheat and paddy. The
private agencies could undertake testing and assaying of the procured stocks,
warehousing and storage of the procured stock in licensed warehouses, with
issue of warehouse receipts (WHRs), and take responsibility for
disposal/offtake through an e-auction platform.
Another model for price assurance can be worked out, wherein the government will entrust credible and financially-sound private entities with procurement of produce from farmers in lieu of a set of policy-enablers and incentives. Each identified entity, with a wealth of experience in supply-chain, shall undertake price support operations for a set of agri-commodities (grains, pulses, oilseeds, spices, cotton, potatoes, onions, etc). The entity can be mandated to procure the assigned commodities from farmers/market through a transparent online platform. The procurement will take place irrespective of market prices; the entity will be obliged to buy the minimum fixed quantity of the commodity/commodities assigned in its basket during each procurement/ harvest season. The entity would report its stocks to the government and shall provide free access to auditing by the government. In case the government wants to intervene in the market due to sudden price rise of the commodity, it would have the first option to purchase, but the private entity will have to be compensated for purchase cost and carrying cost, with a reasonable margin.
Another model for price assurance can be worked out, wherein the government will entrust credible and financially-sound private entities with procurement of produce from farmers in lieu of a set of policy-enablers and incentives. Each identified entity, with a wealth of experience in supply-chain, shall undertake price support operations for a set of agri-commodities (grains, pulses, oilseeds, spices, cotton, potatoes, onions, etc). The entity can be mandated to procure the assigned commodities from farmers/market through a transparent online platform. The procurement will take place irrespective of market prices; the entity will be obliged to buy the minimum fixed quantity of the commodity/commodities assigned in its basket during each procurement/ harvest season. The entity would report its stocks to the government and shall provide free access to auditing by the government. In case the government wants to intervene in the market due to sudden price rise of the commodity, it would have the first option to purchase, but the private entity will have to be compensated for purchase cost and carrying cost, with a reasonable margin.
For
such a model to work, certain enablers and incentives will be required from the
government, which may include the following: a) unified licences for the
entity, b) exemption of the entity’s procurement account from corporate income
tax for certain period of time, c) disposal of procured stocks to be up to
discretion of the entity, d) unburdening the entity from stock-limits and
export restrictions, e) fixing import duties in a manner such that the landed
price is not less than domestic market price (except in times of chronic
shortage), f) giving the entity the benefit of any investment in creation of
supply-chain infrastructure (as per the current benefits under section 35AD of
the IT act), and g) compensating the entity for undertaking price support
operations as with a reasonable percentage of MSP (for meeting the
infrastructure, administrative overheads, storage, assaying, other procurement
incidentals and price-risk).
The
government would pro-actively promote the launch of futures and options for all
commodities under the price support scheme through the commodity exchanges and
there would be no position limits imposed on such entities for hedging.
Such a model would help reduce price volatility and provide a more stable and sustainable income for the farming community. It will be a constructive step towards doubling farmer income by 2022. Besides, it will also help minimise cropping distortions due to irrational price signals so that cropping decisions are more closely aligned to the market. A major role by the private sector, through a well-designed and transparent incentives and duties framework will be the key component of a market-driven and sustainable system that does not put an onerous burden on the exchequer while providing price assurance to farmers.
Such a model would help reduce price volatility and provide a more stable and sustainable income for the farming community. It will be a constructive step towards doubling farmer income by 2022. Besides, it will also help minimise cropping distortions due to irrational price signals so that cropping decisions are more closely aligned to the market. A major role by the private sector, through a well-designed and transparent incentives and duties framework will be the key component of a market-driven and sustainable system that does not put an onerous burden on the exchequer while providing price assurance to farmers.
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