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No Breather for Food Subsidy Bill

Sudhakar Gummula (sudhakar@farmvoice.in) is an agribusiness consultant.

 

Farm support payment schemes, aimed at compensating farmers when market prices fall below a certain predetermined price level, work differently in different countries. The article “Price Deficiency Payments and Minimum Support Prices: A Study of Selected Crops in India”  (EPW, 19 May 2018) by T Haque and P K Joshi had recommended schemes similar to the Price Loss Coverage programme of the United  States as an alternative to the agricultural minimum support price programme in India. This article debates the inferences made, in particular, why price deficiency payment schemes such as the Bhavantar Bhugtan Yojana, will not reduce the food subsidy bill.

Agricultural price support schemes, especially the minimum support prices (MSPs), have been a contentious issue in India. In this context, the Madhya Pradesh (MP) government’s experiment with the Bhavantar Bhugtan Yojana (BBY) between October 2017 and September 2018—a price deficiency payment scheme wherein farmers received the difference money as a government guarantee when they failed to garner the minimum price for the crop they produced—received much attention as a potentially viable alternative of the MSPs.

Though the pilot has been rolled back by the MP government towards the end of 2018, the significance of such alternative strategies in the overall discourse on agricultural price support policy will always remain pertinent, and so will be any critical discussion on this issue. In the first place the BBY appears to be a rather problematic mix of two safety net payment programmes implemented by the United States (US) government—namely the Price Loss Coverage (PLC) and the Agriculture Risk Coverage–County (ARC-CO).

These two programmes are mutually exclusive and farmers in the US need to choose one of these two as their safety net payment method in case they prefer commodity-wise payments. They can choose different payment methods for different crops grown on the same farm, but they cannot choose both the methods for the same crop grown on a farm. And these safety net payments are aimed at decoupling current production decisions by farmers from the quantum of payments received.

In the Indian context, however, the inappropriate combination of such two programmes combined with the inadequate communication about the BBY seems to have created confusion in the Indian market. Also, it does not seem to be aimed at decoupling farmers’ cropping decisions from payments received.

Moreover, the discussion on the scheme’s merits and demerits attracts importance especially after recent handling of farm distress in India, by introduction of various new schemes both at the central and state government level. This particular scheme called the BBY is a variable pay based on open market price movements, while the Pradhan Mantri Kisan Samman Nidhi scheme introduced at the national level, the Rythu Bandhu scheme of Telangana and the Kalia scheme of Odisha are fixed payments irrespective of price movements. Considering the cyclical nature of agricultural prices, the BBY has its own advantages when compared to the fixed payments as the government can avoid payments when prices reach peak levels exceeding the assured prices, whereas fixed payments cannot be avoided and remain as a permanent subsidy burden.

The discussion in this article is limited to the design of BBY in comparison to the schemes adopted in the US and the questionable claim of Haque and Joshi (2018) that safety net schemes like these can help substantially reduce subsidy bill, as the government will have to pay only the difference amount rather than full amount as in the case of the MSP. Before coming to any conclusion about the scheme’s ability to reduce subsidy bill, it is necessary to relook at the workings of the US safety net payment methods and compare them with existing payment methods in India.

Price Loss Coverage in the US

The Agricultural Act, 2014 of the US supplanted the direct payments, countercyclical payments, and the Average Crop Revenue Election (ACRE) programmes by the PLC, ARC-CO and the Agricultural Risk Coverage–Individual (ARC-IC) (GOUSA 2014). Under the new programmes, producers of the covered commodities can choose to enrol in one of the three programmes. These three programmes allow for two ways of payments. One is a commodity to commodity basis and the other is on whole farm revenue basis irrespective of whichever covered crops they grow on the same farm. The PLC and ARC-CO fall under the first category while ARC-IC falls under the second category. If he chooses to go for whole farm basis his income is guaranteed by the option ARC-IC. On the other hand, if he goes by commodity to commodity basis he can choose either the PLC or ARC-CO depending on his convenience and market knowledge. Once the payment method is chosen, income guarantees are determined by the procedures laid down. While the ARC-IC guarantees 86% of benchmark per acre revenue on 65% of registered base acres of the individual farmers, the guarantees provided by the PLC and ARC-CO are based on predetermined commodity prices, payment crop yields and registered base acres.

The base acres registered by individual farmers who own or operate cropland at the beginning of the now repealed safety net programmes, are key to the estimation of final payments to individual farmers. When the Agricultural Act, 2014 came into effect farmers were provided a one-time opportunity to reallocate their base acres towards different covered crops, based on their recent (2009–12) cropping history, without increasing the total base acres.

The farmers choosing PLC can update their crop yields using 90% of the farm’s average yield in 2008–12, excluding any year in which the covered commodity was not planted. On the prices front, the most recent 12-month national marketing year average (MYA) price estimated by the United States Department of Agriculture (USDA) is compared with the reference market price as fixed in the Agricultural Act, 2014, to calculate difference amounts. If the price in any recent past year is below the reference price, it is replaced with reference price for calculation of average price.

For the ARC-CO payment method the count of the base acres is identical to that in the PLC but the crop yields used for calculation of final payments are county-level yields as determined by the Farm Service Agency (FSA). On the price front, an Olympic average of five-year national MYA price is compared with the current year MYA price.

Final payments are calculated on the basis of the “registered” base acres rather than “actual planted” acres under the concerned crop. For instance, a farmer owning 100 acres may choose to register 50 acres as base corn acres and 50 acres as base soy acres for the period the programme is in effect. Once this is done all his payments are calculated with respect to changes in prices of these two commodities, irrespective of actually planted crops and total acres for each crop.

The major aim of these safety net programmes is to stabilise the farmers’ income while leaving market forces to determine commodity prices. Total revenue from any farm is determined based on three variables, namely the number of acres planted, yield from each acre planted and price of each crop planted and sold. Farmers’ income will be stabilised if all these three variables are controlled; these safety net programmes adopted by the USDA are aimed at achieving the same. Prefixed base acres, prefixed guarantee yields and prefixed prices under these programmes facilitate the stabilisation of farmers’ incomes while decoupling payments from future production decisions.

Unlike MSP payments in India, these programmes in the US work not just on variation in market prices of covered commodities from prefixed reference or target prices, but also take into account prefixed acreages and crop yields, while calculating guaranteed revenues for individual farmers. As illustrated in FSA (2014) fact sheets, if a US farmer registered for PLC payment for a particular crop, then in a given year is entitled to receive payment if 12-month national MYA price for that crop falls below the reference price as set in the farm act. The final payment is calculated for 85% of base acres—irrespective of how many actual acres planted of that crop in the given year—and registered crop yields which are based on the recent history of the individual farm. For instance, if a farmer has registered 100 base acres for corn for the entire term of the act, then in a given year if corn MYA price falls below the reference price, the payment is received for 85 acres, even if he has planted “zero” or 500 acres of that crop in that particular year. In other words, while reference price stands as a trigger point for payment, it is the registered historical base acres and individual crop yields that decide the quantum of final payments to be given to individual farmers in PLC programme.

BBY versus the US Programmes

The BBY programme combines some features from the PLC as well as the ARC-CO. For example, the yield calculation procedure under the BBY is similar to the ARC-CO method. The district average productivity figures for the best three years out of five preceding years as available with the agricultural department are used, unlike PLC where individual farm yields are used. Similarly, the calculation of the price gap by using the MSP and the modal price of the current year is somewhat similar to PLC payment method. This modal price is akin to national MYA price as established by the USDA.

On the other hand, there are some other features that are different. The first being the consideration of individual farmers’ selling prices. If any individual farmer is capable of selling at higher than the modal price, he will be paid less subsidy amount, which is a disincentive for a farmer who is good at marketing his crop or produces better quality crop. In the US government programmes, these individual farmer selling prices are not considered at all and the payments will be automatically triggered to all farmers registered for that crop at a uniform rate. For the US programmes the reference prices are fixed for five crop years from 2014 to 2018 during which the Farm Act, 2014 was in force. There is also no guarantee that these prices will rise when the new farm act comes into force in 2019. However, in the case of BBY the MSPs rise every year.

The US farmers need to wait for the announcement of official national MYA price to receive their safety net payments, which happens only after completion of the 12-month marketing year. In the case of BBY, payments were promised immediately after completion of the sale process, which is against the principle of green box payments under World Trade Organization that says subsidies cannot be paid for current year production. Also, market price in the BBY relates to harvest season, rather than the entire marketing year of that crop. Further, Indian farmers selling outside the mandi system were excluded from BBY scheme, citing operational difficulties. In India, large numbers of farmers are small and marginal farmers whose landholding size is very small, which allows them to produce smaller quantities of crops. As taking these crops to mandis for sale is unviable for them and they prefer to sell at the village level itself. As this scheme caters only to farmers selling in the mandi system it is clearly putting these small and marginal farmers at a disadvantage.

Minimum Support Prices

The MSPs in India were not designed to be a reference or targeted market price for agricultural commodities so that the actual market price should remain at or above that level during the marketing season. And there is no legislation that penalises or prohibits private traders from purchasing the commodities below the MSP. It is a pure assurance from the government to farmers saying they will purchase the farm produce in case farmers fail to obtain a certain minimum price from the private traders. However, under the current MSP system, the price is guaranteed only to those farmers from whom the Food Corporation of India (FCI) or any other government agency physically purchases the commodity, while others just end up selling at whatever the price the market fetches.

The main objective of the government procurement of crops is to prevent distress sales by farmers, especially during the harvest seasons, when the market prices tend to be the lowest. If the aggregate production is large, market forces may not be able to fetch remunerative prices to farmers, in which case purchases by government agencies at predetermined prices—that are arrived at by taking the cost of cultivation into consideration—help prevent distress sales by farmers.

Theoretically, the MSP is estimated on par with the farm harvest price (FHP), notwithstanding the marketing and transportation (to mandi) costs. In other words, wherever the MSP is implemented it should always remain higher than the FHP, else there is no point in farmers bringing their produce to the mandi and selling to the government, as they can sell at local village markets at a better realisation. So, if the FHP is higher than the MSP—which happens when there is a sufficient private demand—farmers prefer to sell at the farm level, and when it is lower, they prefer to sell to the government at the MSP. Thus, the difference between the FHP and MSP becomes an arbitrage cost to the farmers that helps them in deciding whether to sell at the farm level or to take it to the market. Under these circumstances the proposition by Haque and Joshi (2018) that government shall pay farmers only when the FHP is lower than MSP, that too an amount equal to the difference, means the government will reimburse farmers only the arbitrage cost and nothing else.

Food Subsidies in India

The two main agencies that are involved in providing price guarantees to farmers in India are the Cotton Corporation of India (CCI) and the FCI, which purchase the crops directly from farmers during the harvest season at predetermined prices. Cotton being a pure commercial crop, and with the lack of government interest in public distribution of the crop, the CCI which is a nodal agency for MSP procurement, sometimes ends up gaining profits by selling at higher prices during the off-season. Any losses in its operations arising out of failure to obtain higher prices later in the season are reimbursed by the Government of India (GoI).

On the other hand, the FCI, which is the nodal agency for foodgrains procurement at MSP and distribution at subsidised prices, receives the majority of food subsidy as a compensation towards any loss incurred by it while performing these functions. Given the continuous rise in the MSP, the FCI encounters proportional growth in its cost of procurement. The difference between economic cost—that is obtained by adding the cost of distribution to the procurement cost—and sales (at subsidised as well as open market rates) realisation, amounts to the total subsidy. And the escalating food subsidy is the result of the constant subsidised sale prices over the years vis-à-vis the growing MSPs. These sale prices are now legally bound under the National Food Security Act (NFSA), 2013.

As per the GoI’s budget documents, expenditure towards food subsidy (inclusive of sugar) in 2015–16 was ₹ 1,39,419 crore. Of this ₹ 1,12,000 crore were allocated to the FCI and rest to various states for carrying out decentralised procurement and distribution of foodgrains (GoI 2017). Further as per audited accounts of the FCI, total food subsidy incurred in 2015–16 was about ₹ 1,02,425 crore, of which ₹ 96.3 thousand crore (94%) was incurred towards the payment of consumer subsidy (that is, the economic cost of its operations net of its sale proceeds), while the rest is for maintenance of buffer stocks (FCI 2016).

In other words, ultimate beneficiaries of food subsidy incurred by the GoI are poor consumers and not the farmers, as these consumers receive foodgrains at sharply lower than the market prices throughout the marketing season. And farmers may sometimes receive higher than market prices because the fixed MSPs are calculated based on estimates of costs of cultivation, irrespective of the prevailing market price. Under these circumstances, while proposing to pay farmers only the difference between the FHP and MSP so that the same would result in substantial reduction of subsidy bill, Haque and Joshi (2018) may have assumed: (i) that all (including poor) consumers will purchase at market-determined prices rather than subsidised prices, and (ii) the NFSA will eventually be repealed.

The dual responsibility of the government to provide cheaper food to consumers and minimum guaranteed prices to the farmers makes the task of reducing the subsidy bill more difficult, as long as the gap between both of these prices remains large. Even if direct payment methods are adopted (both to farmers and consumers), it may change the “way” subsidies are paid out but not reduce the total subsidy burden as such. Let us consider the cases of both MSP and price deficiency programmes to explain this.

Under the existing public distribution programme, suppose grain is purchased at an MSP of ₹ 16 a kilogram (kg) and an additional ₹ 4 per kg forms the costs of procurement and distribution. With the subsidised entitlement price set at ₹ 2 a kg, the total subsidy burden will be ₹ 18 a kg.

Alternatively, under the price deficiency scheme, let the market prices be ₹ 10 a kg and because of the efficiency factor the cost to private companies for procurement and distribution is only ₹ 3 a kg. Then the final sale price to consumers would be ₹ 13 a kg. In this case the government has to pay two types of subsidies: first to the farmers to cover the gap between market price and MSP, which is ₹ 6 a kg and second to the consumers to cover the gap between private sale price and entitlement price, which is ₹ 11 a kg. And these together add up to a total subsidy payout of ₹ 17 a kg.

In other words, the maximum savings to the government due to the direct subsidy payments is equal to a difference between the efficiency costs of public and private companies engaged in the business of procurement and distribution. These subsidy savings may soon vanish, with private companies trying to maximise their profit margins, as against the public companies that work on a cost-to-cost basis.

Conclusions

Safety net programme payments, as envisaged by the US government, try to stabilise every registered farmer’s income by guaranteeing a certain percentage of income based on historical acreages, historical crop yields and the difference between prefixed price and current market price. The MSP payments in India, on the other hand, guarantee a certain price irrespective of how much an individual farmer has produced. Although these two programmes work on the same principle of difference between market price and prefixed price, there is a clear distinction between the way the payment is calculated and distributed. But, the BBY scheme while attempting to reconcile divergent programmes added some unworkable innovations, which could neither help farmers nor decouple the farm payments from individual farming decisions. This may prove worse than the MSPs by distorting cropping patterns towards such crops for which the prices are “guaranteed.”

The critical point to note here is that under the current MSP system the price is guaranteed to only those farmers from whom the FCI or any other government agency physically purchases the commodity. In the case of the price deficiency payment system, however, due to the direct payments through bank accounts, every farmer will be compensated, which may encourage more farmers to plant the “few covered” crops by abandoning the others. Further, the assumption that these types of payment methods help in reducing the subsidy burden, is questionable as food subsidy in India is calculated as a difference between economic cost and entitlement price to consumers. At the most, it might help change the way subsidy payments are made. In cases where both the producer and consumer subsidies are paid out on the price basis, the only way left would be to reduce the price gaps.

References

Farm Service Agency, USDA website https://www.fsa.usda.gov/

FCI (2016): “Food Corporation of India Annual Report 2015–16,” http://fci.gov.in/app/webroot/upload/Finance/FCI_inside_2015-16_19_April..., viewed on 20 July 2018.

FSA (2014): “Farm Service Agency of USDA Factsheets,” https://www.fsa.usda.gov/programs-and-services/arcplc_program/arcplc-lib..., viewed on 20 July 2018.

GoI (2017): “Expenditure Budget Document for the Year 2017–18,” Government of India, https://www.indiabudget.gov.in/budget2017-2018/ub2017-18/eb/sbe16.pdf, viewed on 20 July 2018.

GoUSA (2014): Agricultural Act of 2014, Pub L No 113-79, Government of USA, https://www.congress.gov/113/plaws/publ79/PLAW-113publ79.pdf, viewed on 20 July 2018.

Haque, T and P K Joshi (2018): “Price Deficiency Payments and Minimum Support Prices: A Study of Selected Crops in India,” Economic & Political Weekly, Vol 53, No 20, 19 May.

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