, , ,

What do you think about India’s Public Distribution System? What about the ‘Minimum Support Price (MSP)’ intervention of the Government in the agricultural markets?

Public Distribution System

The Public Distribution System (PDS) in the country facilitates the supply of food grains and distribution of essential commodities to a large number of poor people through a network of Fair Price Shops at a subsidized price on a recurring basis1.’

It comes across as a noble, well intentioned and equitable policy. Its meant to provide food security to the poorest of the poor. It ensures that irrespective of whether I earn today, I can be sure to have some food on the table.

Minimum Support Prices

Similarly, the government sets MSP for a total of 23 crops including Wheat, Rice, a few pulses and coarse grains such as Jowar, Bajra, Maize, Ragi, etc to support the farmers.

The Central Government extends price support to paddy and wheat through the Food Corporation of India (FCI) and State Agencies across the country. The procurement policy is open ended. Under this policy, whatever wheat and rice are offered by farmers, within the stipulated period & conforming to the specifications prescribed by Government of India, are purchased at Minimum Support Price (MSP) by the State Government agencies including FCI for Central Pool.

However, if producer/farmer gets better price in comparison to MSP, they are free to sell their produce in open market i.e. to private trader/ anyone. The objective of foodgrains procurement by Government agencies is to ensure that farmers get remunerative prices for their produce and do not have to resort to distress sale2.’

These policies help the nation be food secure. They enable the government to be nimble and react to the crisis created due to the coronavirus pandemic. The government introduced the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) under which the eligible beneficiaries receive 5kg of foodgrains and 1 kg Grams or whole chana per month for a period of three months between April and June, 2020. This time period has now been extended to five more months. In all liklihood, given that we have so much rice and wheat lying with the FCI, the scheme may be extended even further.

As of June 2020, the FCI has 833 lakh tonnes of rice and wheat. This is the highest amount of food grains we have ever had in storage, the previous high being in June 2012. FCI is required to keep a reserve of around 411 lakh tonnes in July of a year. Currently we have double the requirements. This has come in handy. The PMGKAY scheme is expected to use up 320 lakh tonnes upto November 2020, and the government has enough cushion that the scheme can perhaps be extended to March 2021.

Love these policies, right?

Specially if you judge them from the lens of intention.

Lets talk about execution and outcome now.

It can be safely assumed that the government did not foresee the current crisis (and hence requirement of food grains for the PMGKAY scheme), so why did it have double the required reserves of wheat and rice. Why had it been procuring so much rice and wheat?

Surpluses have a huge cost of storage and wastage and end being used in making ethanol, lest they be a completely writeoff. This huge surplus has an opportunity cost, both from the demand side as well as from the supply side.

The Demand Side

The government can only distribute what it has already bought. FCI buys food grains at MSPs, bears cost of storing, transporting and distributing them to the ration card holders through the PDS. FCI sells the food grains at highly subsidized prices. So, it needs to be compensated by the government. For the year 2019-20, FCI placed a demand of Rs. 3.18 lakh crore in front of the government, which had allotted only Rs. 1.09 lakh crore against food security. The remaining Rs. 2 lakh crore expenditure which has already been incurred does not figure in the the government’s fiscal deficit because of accounting and definitions related shenanigans.

The question arises, that if FCI has already spent the money on procuring food grains and is not claiming it from the government which doesn’t have a matching IOU in its books, where did FCI get the money to spend in the first place? FCI borrows from banks, which are happy to lend to it because of the implied sovereign guarantee, and from the NSSF (the National Small Saving fund includes PPF, Post office Monthly Income Scheme, KVP, NSC, etc.). Essentially, somewhere in the financial system, this money sits as government borrowing.

This begs the question,’Could this money be better utilized?’, say on healthcare or education.

The Supply Side3

On the supply side the MSPs create a guaranteed market for wheat and rice (and other crops but wheat and rice are the ones that make up the bulk of purchases) incentivizing the farmers to choose these crops instead of others which may be better suited to their regions. Other crops (such as pulses) go through cycles of shortage (high revenue for farmers) and plenty (low revenue for farmers) whereas the MSP crops have a guaranteed market and a guaranteed price. The farmer is a rational person. His incentives are aligned towards rice/wheat, and so we see a huge supply of these crops.

However, this comes at a cost. Consider the case of Punjab which is a semi-arid state. It offers free electricity to farmers, who in turn use it to draw water from deep underground, leading to a plummeting water table, to grow water guzzling ‘rice’. The farmers should not be growing rice in an area where there is insufficient water. Under normal conditions (no MSPs and no free electricity), the farmers would not be growing a water intensive crop like rice in Punjab.

This mega cultivation of rice and subsequent burning of stubble leads to problem of pollution and smog in the winter months in Delhi. Pollution has now become a political problem which has no easy solution. Delhi government doesn’t have enough levers to negotiate with the Punjab government which drags its feet because it has limited state capacity to implement rules or the ability to risk alienating the farmers who are a huge vote bank.

MSP was started to encourage the farmers of Punjab to grow a high yield variety of wheat, which led to the green revolution. Somehow we have ended up in a situation where farmers are incentivized to grow rice leading to several unintended unpleasant consequences.

Uttar Pradesh and West Bengal are the two largest producers of rice in the country. Yet only 3.6% and 7.3% of the farmers in these two states, respectively, benefit from the MSPs. These figures are at a staggering 95% and 69% for Punjab and Haryana.

Something similar is happening in the state of Maharashtra with respect to another water intensive crop – Sugarcane. Sugarcane is subject to a ‘Fair and Remunerative Price’ (FRP), which functions like the MSP, thereby incentivizing the farmers to produce this crop.

What should be done?

‘If water consumption is measured in terms of per kg of rice, West Bengal becomes the most efficient state, which consumes 2,169 litres to produce one kg of rice, followed by Assam (2,432 litres) and Karnataka (2,635 litres). The water use is high in Punjab (4,118 litres), Tamil Nadu (4,557 litres) and Uttar Pradesh (4,384 litres).’

FCI needs to ramp up operations in other states such as Uttar Pradesh, Bihar and West Bengal, while simultaneously limiting pocurement of wheat and rice in Punjab and Haryana. This may incentivize farmers to shift to pulses or oilseeds which are better suited to these states.

It should also ramp up procurement of pulses.

The funny thing is that the government knows this. These facts are well researched and documented in governments policy papers.


You must judge a policy by its outcome and not its intention.

Credit: I heard this episode of the insightful podcast EconCentral and it inspired me to write this post.