In the heat of the ongoing protests against the new farm laws, some views have emerged that the state has saddled the Indian farmer with excessive taxes. In support of this contention, methodology and data from the Organisation for Economic Cooperation and Development (OECD) have been used to claim that Indian farmers have enjoyed “negative support”.
Indeed, some have gone as far as to suggest that crores of rupees have been “plundered” from Indian farmers owing to agricultural policies pursued in India. Is this really so? What are the reasons for this so-called negative support? If support has indeed been negative, are the Agriculture Produce Market Committee (APMC) Act and the Essential Commodities Act (ECA) to be blamed? What are the implications of negative support for the minimum support price (MSP) and procurement regime in India? These issues need a close examination so that informed decisions are made by all stakeholders.
Notion of negative support
The OECD provides information on the level of support provided to farmers through different programmes using an indicator called the Producer Support Estimate (PSE), consisting mainly of two elements—budgetary payments and market price support. The OECD estimates that support to Indian farmers was negative to the tune of -Rs.1.62 lakh crore or -5.47 per cent of India’s total value of agricultural production in 2019. Based on these estimates, some have argued that Indian farmers are net taxed. Simply stated, this means that, in net terms, Indian farmers’ payout is greater than the “support” they receive from the government.
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According to the OECD, support to Indian farmers declined from Rs.9,921 crore in 2000 to -Rs.1.62 lakh crore in 2019. The negative support was the highest in 2013, amounting to -Rs.6.06 lakh crore or -27.8 per cent of the total value of agricultural production. The negative support has declined in recent years. However, there are wide variations in the support level during 2000-2019 (Figure 1). During this period, the total support to Indian farmers is estimated to have been -Rs.38 lakh crore.
Level of budgetary support
However, it is a well-known fact that the Central and State governments implement various schemes and programmes to support agriculture and farmers. These include the MSP and procurement regimes and the PM-KISAN (Pradhan Mantri Kisan Samman Nidhi) scheme; moreover, the Centre and State governments provide input subsidies for fertilizer, irrigation and electricity, support through crop insurance, and invest in infrastructure facilities, apart from undertaking several other measures. All these have a bearing on the extent of agricultural production, productivity and, therefore, incomes. The OECD estimated the Central and State budgetary support for various programmes, excluding the budgetary outgo on the operation of the MSP scheme, to be almost Rs.3 lakh crore or 10.5 per cent of the total value of agricultural production in 2019 (Table 1).
Level of market price support
Despite the expenditure of about Rs.3 lakh crore by the Central and State governments, support to Indian farmers turns out to be -Rs.1.62 lakh crore owing to a huge negative market price support of Rs.4.62 lakh crore in 2019. During 2000-2019, the total market price support is estimated to have been -Rs.63 lakh crore, compared with the budgetary support of Rs.25 lakh crore, resulting in a negative PSE of Rs.38 lakh crore. Additionally, governments incurred Rs.12 lakh crore on general services and infrastructure during 2000-2019, which is not included in the PSE. In simple terms, the market price support in any given year is calculated by multiplying the difference between domestic price and reference price of a specific agricultural commodity with its total production in the relevant year. The reference price is mainly the international price of that particular commodity, adjusted for transport, charges at ports and for various other factors in order to calculate the market price support at the farm gate.
In case the domestic price is less than the adjusted international price, the market price support for that commodity would be negative and vice versa. The sum of the market price support over all agricultural commodities provides the total market price support for a country. Thus, the market price differential or the gap between the domestic and adjusted international price determines whether a commodity has positive or negative market price support.
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For India, the OECD estimates the market price support for approximately 20 agricultural products. The market price support was positive for products such as sugar, poultry, pulses, cotton and wheat as the domestic prices of these were higher than the reference prices. On the other hand, for products such as bovine meat, rice and milk, the market price support was negative because domestic prices were lower than the international prices for the respective agricultural product. Figure 2 shows that the market price support in India was massively negative at -Rs.2.18 lakh crore for milk, accounting for 47 per cent of the overall negative market price support.
Variations in market price support
In general, the market price support of a product mainly depends on three variables, i.e. the domestic price, the adjusted international price, and the total output of the agricultural commodity. The domestic price fluctuates on account of many factors, including domestic demand and supply, the minimum support price level, and trade measures such as tariffs. Similarly, international prices can fluctuate because of various factors such as supply, demand and the extent of subsidies in the international market, particularly in the main producing countries. Further, total production may vary due to changes in the cultivated area or in productivity. Since all three variables cannot remain constant, the market price support fluctuates from year to year because of variations in the inherent data.
Let us take the case of wheat and milk, as shown in table 2. In 2015, the domestic price of wheat was lower than the reference price by Rs.607 per tonne. This resulted in a negative market price support of -Rs.5,601 crore for this commodity. However, within four years, the market price support changed direction as the domestic price in 2019 exceeded the international price by Rs.401 per tonne. As a result, the support became positive, to Rs.4,034 crore. On the other hand, the market price support for milk became negative after 2015 because the domestic price was lower than the reference price. The negative support for milk was estimated to be -Rs.2.18 lakh crore in 2019.
Significantly, the overall negative support of Rs.1.62 lakh crore calculated by the OECD for 2019 was mainly on account of the massive negative market price support of Rs.2.18 lakh crore attributed to milk. This skewed the overall support to agriculture in a negative direction. If the domestic price of milk exceeds the international reference price in the next few years, then OECD calculations could show a positive level of overall support to Indian farmers. Further, even without an increase in budgetary expenditure, the PSE computed by the OECD can show a substantial increase. This may happen if the international reference price of a commodity falls, while its domestic price shows an upward trend. This highlights the obvious fact that the extent of market price support in a particular year is extremely sensitive to the relative movement of domestic and international reference prices. This volatility highlights the need to exercise extreme caution in using producer price support measures as a reliable estimate in evaluating or determining agricultural policies in the medium or long term. Indeed, some would argue that they are highly unreliable for such purposes.
Reasons for negative market price support
The OECD suggests the following reasons for the negative support: the Essential Commodities Act (ECA), the State-level APMC Acts, and on and off export restrictions. According to the OECD, these restrictive policies influence pricing, procuring, stocking, moving and trading, which results in negative price support.
However, attributing negative support to specific measures or government interventions is extremely difficult as it fails to explain the reasons behind positive support to some products and negative to others, despite these measures being in place for a long time. The support to pulses, sugar and poultry, among others, was positive for several years, whereas support to most products such as rice, wheat, maize and cotton has shown significant swings from positive to negative and vice versa over the years. For instance, the support to cotton was Rs.380 crore in 2017, which became negative to the extent of -Rs.5,102 crore in 2018 and again became positive to the extent of Rs.4,414 crore in 2019.
Whether or not the recent farm laws will lead to positive market support will depend on the relative price movements on the internal and external fronts. If the recent farm Acts result in domestic prices exceeding the relevant international prices, then the OECD methodology will result in positive market price support. If, however, domestic prices continue to remain below the international prices, then negative price support will persist. The wide variations in domestic and international prices, arising from an array of factors, can cause market price support to swing between positive and negative in the future as well.
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Therefore, the usage of the OECD’s methodology is inadequate to conclude that government interventions such as the APMC or the ECA have led to negative support. Strikingly, irrespective of whether the AMPC or the ECA are in force or not, the calculation may continue to indicate negative support. Support to farmers can increase or decrease irrespective of domestic changes because of imperfect market conditions on the external and internal front.
Negative support and the MSP
One way to offset negative support is to increase the MSP and enhance procurement operations. However, the OECD and some others have recommended exactly the opposite; they call for the scaling down of support prices and procurement operations while curtailing the role of the public distribution system by limiting the coverage of the National Food Security Act, 2013 (NFSA). Moreover, they have called for the reduction of tariffs on agricultural commodities, implying a more direct exposure to international commodity markets. The main premise of these arguments is that the “efficiency” gains accruing from the unhindered play of market forces would offset the negative support and improve farmers’ remuneration.
However, it would be naive to expect that the OECD recommendations would necessarily lead to positive support for Indian farmers. This is because domestic and international prices are influenced by multiple factors. The extent of trade liberalisation, subsidy levels prevailing in other producer countries, import surges, changes in demand-supply conditions, and unpredictable weather conditions may lead to considerable fluctuations in agricultural prices and farm incomes. The adverse impact may be further compounded by the extent of dependence on rain-fed agriculture, the dominance of small and fragmented landholdings, the subsistence nature of farming, and the threat of frequent market failures.
In short, the role of price support based on a functioning public distribution system cannot be underestimated, as has been emphatically demonstrated in the wake of the COVID-19 pandemic. In fact, without these measures in place it would have been impossible to implement the Pradhan Mantri Garib Kalyan Anna Yojana or the NFSA. The latter reached subsidised food to more than 80 crore people; this would not have been possible without the MSP and procurement operations.
Leaving farmers at the mercy of market forces and free trade without adequate safety nets would adversely affect farm incomes. It is to be emphasised that even rich countries provide their farmers substantial support in the form of price support, deficiency payments and other forms of budgetary support to mitigate the adverse effects of market forces. It is heartening to note that the government has reiterated its commitment to the MSP scheme, which has been one of the effective safety nets for Indian farmers.
It is a travesty to claim that the Centre and the State governments have “plundered” lakhs of crores of rupees from Indian farmers. The governments are implementing numerous programmes for farmers’ welfare. However, owing to negative market price support for some products, the overall support level turns out to be negative. The huge negative market price support may become positive in the future owing to a fall in the international prices of a few significant commodities. It is obvious that government price support policies for agriculture, which have a bearing on the livelihoods of millions of people, cannot be summarily abandoned merely on the basis of the OECD methodology.
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In fact, it may well be possible for the support level in India to become one of the highest in the world in the near future, even without any additional government assistance, if international prices were to fall below domestic prices. In such a situation, India’s agricultural support policies such as the MSP could be criticised by other countries and possibly used as a leverage to gain access to the Indian market for their agricultural products.
There is no doubt that Indian agriculture requires reform. However, some of the OECD’s main recommendations are unlikely to reverse the negative support to Indian farmers calculated by it. Given the wide fluctuations in market price support, PSE should be used cautiously in determining the effectiveness of agricultural support policies and other measures. It is imperative that the OECD methodology is dissected properly in order to appreciate its fallibilities and intricacies. That has to be a prerequisite for an informed debate on agricultural policies, which is a life and death issue for millions of Indians.
Sachin Kumar Sharma is Associate Professor at the Centre for WTO Studies, Indian Institute of Foreign Trade, Delhi. He has been an active participant in the negotiations on agriculture at the WTO. Paavni Mathur and Raihan Akhter are Research Associate and Research Fellow, respectively, at the Centre for WTO Studies, Delhi. All views expressed here are personal.