Indian Agriculture #2.5: A response to flawed economic arguments
Jagjit Singh Dallewal's article demonstrates a poor understanding of economics and incentives.
Jagjit Singh Dallewal is a farmer leader from Punjab, and the coordinator of Samyukt Kisan Morcha. He has been protesting against the government, demanding a legal guarantee for a Minimum Support Price (MSP) on all 23 crops procured by the state.12 A few days ago, he penned an article in the Indian Express in defence of the MSP. I recently covered the many pitfalls of the MSP regime. Here’s the post that lays it all out exhaustively.
While the demand for a legal guarantee for MSP gains momentum, I think this is an opportune moment to point out the pitfalls and flaws in economic reasoning often employed by proponents of the MSP regime.
How does a legal guarantee for MSP differ from the current policy?
Let’s clear up a few basics here. When farmers ask for a legal guarantee for the MSP, what do they actually want? Isn’t the government procuring crops at the notified MSP anyway? The answer is complicated.
The current MSP regime was recommended by the Commission for Agricultural Costs and Prices (CACP) in the 1960s. The aim was to de-risk farmers’ investment in Green Revolution technologies, that would produce high yields of crops. By using MSPs as a tool, the government ensured that high yields wouldn’t depress prices and hurt farmers' pockets.3 Crucially, the MSP wasn’t a legal guarantee, but simply a policy tool. Political feasibility aside, it is easy for the government to withdraw the MSP because it isn’t set in law, but merely recommended by the CACP.
The current government withdrew the three farm bills introduced in September 2020. Sensing the political weakness of the government, various farm groups pressed hard to get a legal guarantee to the MSP arrangement. While different groups have varying conceptions of what a legal guarantee means, a few proposals put forward were:
Setting a nationwide price floor for MSP crops. Even private traders wouldn’t be able to buy crops at prices below MSP.
Force the government to legally buy all 22 crops at MSP unless farmers receive better prices elsewhere.
Have a Price Deficiency Payment (PDP) scheme, where the government provides remuneration for the difference between the MSP and the actual selling price of the crop.
Each of these has some market distorting effects. Most proponents of MSP legalization are in favor of either a nationwide floor or a compulsory purchase of all crops by the government.
Jagjit Singh Dallewal’s arguments in favor of a legal MSP
In his recent article, Dallewal lays out his thoughts in favour of a legal version of a MSP. Most of the arguments are based on flawed economic reasoning and cherry-picked data, while some are mainly appeals to emotion. The article is available here, and I intend to dissect it in its entirety.
[MSP] started about 60 years ago when the country was unable to feed its growing population as a safety net for farmers … the government pushed for increased agricultural production by providing free fertilisers, subsidies, and chemicals. This created a situation where farmers, who were never dependent on the market before, became dependent on it. Traders took advantage of this, and the farmers were exploited. Slowly, the cost of production increased, but the MSP remained far behind. This could be one of the reasons for the rise in farmer suicides.
Embedded in this statement is an entitled worldview. What is so special about farmers that they shouldn’t depend on the market? How else would pricing signals be communicated? A major function of markets in a society is the efficient allocation and distribution of resources in society. Let’s suppose for a moment that farmers aren’t dependent on the market. They consume subsidized fertilizers and chemicals that could have greater utility in another part of the economy. Without price signals and the existence of a market, how is that information supposed to get across to farmers?
Now, let’s consider the argument by some that farmers in Punjab do not need MSP. The intellectual class and the Punjab government express concern about the depleting groundwater, but no concrete solutions have been offered. It is even cited that it takes 3,000 to 3,500 litres of water to produce just one kilogram of rice. This information has been repeated so much that people are fed up.
This is a textbook example of manufacturing facts. I looked into finding a source that would verify the claim that producing one kilogram of rice requires 3,000 to 3,500 litres of water. The International Rice Research Institute measured an average of about 2,500 litres of water for growing a kg of rice. The Guardian did a piece on food production and published a similar number. The Institute for Agriculture and Trade Policy in Australia says that rice is the thirstiest crop in Australia and it requires 21,000 litres of water to grow one kg of it. Regardless of the actual water required, I think it can be safely concluded that rice is pretty water intensive.
Once that has been established, it follows logically that any solution for depleting groundwater must involve reducing either the production of rice or the water required for growing it. There have been a number of concrete solutions offered to mitigate the issue. The foundation for most of them is starting out with crop diversification, planting those crops that use less water, giving more time for the water table to recharge. But the main reason that these solutions are stillborn is because crop diversification isn’t an economically rational choice under the MSP regime. When a price floor is guaranteed for rice, growing other crops means losing sure money. With a legalized MSP, the problem worsens.
Some claim that the groundwater will only last for another 15 to 20 years for drinking purposes. Therefore, farmer unions have started demanding a guaranteed MSP law for 23 crops, hoping it will lead to the promotion of crop diversification. With guaranteed MSP for these 23 crops, farmers in Punjab and Haryana will be encouraged to grow crops that provide better profits than wheat and paddy. This will not only address the groundwater issue but also offer a permanent solution to the problem.
Mr. Dallewal makes a statement inconsistent with the previous one. He says that crop diversification will help address the groundwater issue, but denies that rice causes it. If rice isn’t the issue, then how would crop diversification help with the water table?
A more serious claim is that guaranteeing MSP for 23 crops would promote crop diversification. This is narrowly true in the sense that it would diversify crops out of wheat and paddy, but only into crops for which MSP is assured. As a whole, farming still loses its diversity. It is highly likely that under a legalized MSP regime, most of India just grows these 23 crops, exacerbating environmental and sustainability issues.
In addition to the MSP guarantee law, promoting crop diversification will significantly reduce electricity consumption in agriculture, potentially cutting it by 60 per cent. This will allow for cheaper electricity for household consumers in Punjab. Furthermore, it will help save groundwater, which is crucial for everyone, including farmers, workers, officials, and citizens.
Assuming that energy consumption would be reduced with crop diversification is a hasty generalization. I can see that less water intensive crops would need less electricity to pump water from the ground and to flood the fields. Would that be countered by increased electricity demands from other crops? To me, this is an open question and needs further evidence and thinking to come to a conclusion.
Moreover, the country will save its foreign exchange by reducing the need to import oil and pulses, as India spends nearly Rs 2 lakh crore annually on these imports.
This ties back to my previous points about markets. Because there are market distortions, there isn’t a way for a farmer to know that pulses and oils might fetch better prices than wheat and rice. Why should there be another centralized scheme to push for production of pulses and oils when a relatively free market can do the job?4
Apart from this, some economists and intellectuals suggest that the amount needed to guarantee MSP for crops would be much lower than the sum India spends on oil and pulses imports. Experts have even stated that MSP can be guaranteed for crops with just Rs 20,000 to Rs 50,000 crore. This amount would be a small price to pay compared to the benefits of ensuring a stable agricultural system and reducing the country’s dependency on foreign goods.
I fail to see how Rs 50,000 crore can cover all procurement under MSP. Most figures I have seen are larger. Setting this fact aside, it must be understood that these figures have been based on current patterns of agriculture. Wouldn’t the incentives for farmers change when the government legalizes MSP? What would be the unintended effects? I can think of one. A software engineer who owns farmland would just plant MSP crops to collect a guaranteed income from the government. I know the example is ludicrous, but it illustrates the point I am trying to make. A stable agricultural system can be ensured by establishing free and fair markets. The United States doesn’t have these kinds of price floors, yet it’s agricultural system is stable and highly productive.
This situation is a major cause of farmer suicides. The OECD report reveals that in 2023 alone, the country lost Rs 14.72 lakh crore due to the low rates offered to farmers under MSP. This ongoing financial loss has led to farmers being heavily indebted.
This situation is a major cause of farmer suicides. The OECD report reveals that in 2023 alone, the country lost Rs 14.72 lakh crore due to the low rates offered to farmers under MSP. This ongoing financial loss has led to farmers being heavily indebted.
The government cannot be expected to fund unsustainable agricultural practices indefinitely. No country is rich enough to endure this pinnacle of socialism.
I showed in a previous article (linked below) that liberalizing agricultural laws led to a decrease in farmer suicides5. This is the exact opposite of what this gentleman is suggesting. Private markets can reward farmers more than the government ever can.
There are other appeals to emotion in the article that Mr Dallewal penned. India must get rid of its farmer-saviour complex. It must be understood that — just like everyone else — farmers are providing a service. The government must stop nannying them and expose them to the market. Competing in markets is scary at first sight, but ultimately essential. Only the market is able to communicate the value of various goods to consumers. Producing unwanted surplus is a waste of resources.
Unfortunately, a small share of farmers have threatened to use their street veto to arm twist the government into accepting their demands. They have been fairly successful in getting the government to roll back the three farm laws that liberalized agriculture. Until their proverbial backs are broken, India’s agriculture will remain highly socialist and supremely unproductive.
To be more precise, the government notifies a MSP for 22 crops and a Fair and Remunerative Price (FRP) for sugarcane.
Kharif crops that have MSP notified are: Paddy, Jowar, Bajra, Ragi, Maize, Toor, Moong, Urad, Groundnut, Sunflower Seed, Soyabean, Sesamum, Nigerseed, Cotton.
Rabi crops that have MSP notified are: Wheat, Barley, Gram, Masur, Rapeseed & Mustard, Safflower.
Copra and Jute are the remaining two crops offered MSP. These aren’t really rabi or kharif crops.
I am unsure if this is the best way that investment into Green Revolution technologies could be supported. Price controls almost always lead to adverse outcomes. The US implemented price floors for agricultural produce during the 1930s when the Great Depression was hurting everyone. Even then, it just ended up having farmers produce extra surplus that couldn’t really go anywhere.
As you might have guessed, I am a classic economic liberal. I dislike government interference into free markets unless they fix market failures. There are ample examples where governments have overstepped their boundaries, interfered in markets and caused distortions affecting millions of people. My two favourites examples of this are price controls: rent control and minimum wage.
Specifically, I show that eliminating mandatory selling of produce in government Agricultural Produce Marketing Committees (APMC) helped farmers procure higher prices for their grains, fruits and vegetables.