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A recent news report has discussed the methods by which states such as Chattisgarh have attempted to reform the Public Distribution System (PDS). Chattisgarh has computerised its PDS supply chain and introduced smart cards as part of a slew of measures to plug pilferage and weed out corruption in the system. In an effort to create a national computerised database for PDS, the Ministry of Consumer Affairs has launched an online National Transparency Portal for the Public Distribution System. The portal aims to provide end-to-end computerisation of PDS; it is a single platform in the public domain for all PDS related information. The PDS is a centrally sponsored scheme that entitles beneficiaries to subsidised foodgrains every month. Currently, beneficiaries are divided into the following groups: Below Poverty Line (BPL), Above Poverty Line and Antodaya Anna Yojana. As such, several challenges have been identified in the implementation of PDS. Some of them are as follows:
The creation of the e-portal could help track these issues more effectively and increase transparency in the system. The portal contains information relating to FPS and ration cards attached to the FPS. It is likely that this will help weed out bogus ration cards and improve targeting of subsidies. The portal also has information on capacity utilization of Food Corporation of India, state storage godowns, and data on central pool stocks. This helps track storage supplies of grains at each level and aims to prevent leakage of grain. With respect to data on PDS in states, the portal hosts information such as the central orders on monthly allocation of foodgrain to states, state-specific commodity sale prices, lifting position of states, etc. for public view. All states and union territories will be required to maintain and update the data on the portal. The reforms come at a time when the National Food Security Bill, 2011 is pending in Parliament. The Bill aims to deliver foodgrain entitlements through Targeted PDS to 75% of the rural and 50% of the urban population. The Bill is currently under examination by the Standing Committee of Food, Consumer Affairs and Public Distribution. It proposes reforms to the TPDS, which include the application of information and communication technology, including end-to-end computerisation. These reforms seek to ensure full transparency of records in the PDS and prevent diversion of foodgrains. The creation of the e-portal might be a step towards reforming the PDS. For an analysis of the National Food Security Bill, see here.
Minimum Support Price (MSP) is the assured price at which foodgrains are procured from farmers by the central and state governments and their agencies, for the central pool of foodgrains. The central pool is used for providing foodgrains under the Public Distribution System (PDS) and other welfare schemes, and also kept as reserve in the form of buffer stock. However, in the past few months, there have been demands to extend MSP to private trade as well and guarantee MSP to farmers on all kinds of trade. This blogpost looks at the state of public procurement of foodgrains in India and the provision of MSP.
Is MSP applicable for all crops?
The central government notifies MSP for 23 crops every year before the Kharif and Rabi seasons based on the recommendations of the Commission for Agricultural Costs and Prices, an attached office of the Ministry of Agriculture and Farmers’ Welfare. These crops include foodgrains such as cereals, coarse grains, and pulses. However, public procurement is largely limited to a few foodgrains such as paddy (rice), wheat, and, to a limited extent, pulses (Figure 1).
Figure 1: Percentage of crop production that was procured at MSP in 2019-20
Sources: Unstarred Question No. 331, Lok Sabha, September 15, 2020; PRS.
Since rice and wheat are the primary foodgrains distributed under PDS and stored for food security, their procurement level is considerably high. However, the National Food Security Act, 2013 requires the central and state governments to progressively undertake necessary reforms in PDS. One of the reforms requires them to diversify the commodities distributed under PDS over a period of time.
How does procurement vary across states?
The procurement of foodgrains is largely concentrated in a few states. Three states (Madhya Pradesh, Punjab, and Haryana) producing 46% of the wheat in the country account for 85% of its procurement (Figure 2). For rice, six states (Punjab, Telangana, Andhra Pradesh, Chhattisgarh, Odisha, and Haryana) with 40% of the production have 74% share in procurement (Figure 3). The National Food Security Act, 2013 requires the central, state, and local governments to strive to progressively realise certain objectives for advancing food and nutritional security. One of these objectives involves geographical diversification of the procurement operations.
Figure 2: 85% wheat procurement is from three states (2019-20)
Sources: Department of Food and Public Distribution; PRS.
Figure 3: 76% of the rice procured comes from six states (2019-20)
Sources: Department of Food and Public Distribution; PRS.
Is MSP mandatory for private trade as well in some states?
MSP is not mandatory for purchase of foodgrains by private traders or companies. It acts as a reference price at which the government and its agencies procure certain foodgrains from farmers.
In September 2020, the central government enacted a new farm law which allows anyone with a PAN card to buy farmers’ produce in the ‘trade area’ outside the markets notified or run by the state Agricultural Produce Marketing Committees (APMCs). Buyers do not need to get a license from the state government or APMC, or pay any tax to them for such purchase in the ‘trade area’. These changes in regulations raised concerns regarding the kind of protections available to farmers in the ‘trade area’ outside APMC markets, particularly in terms of the price discovery and payment. In October 2020, Punjab passed a Bill in response to the central farm law to prohibit purchase of paddy and wheat below MSP. Any person or company compelling or pressurising farmers to sell below MSP will be punished with a minimum of three-year imprisonment and a fine. Note that 72% of the wheat and 92% of the rice produced in Punjab was purchased under public procurement in 2019-20.
Similarly, in November 2020, Rajasthan passed a Bill to declare those contract farming agreements as invalid where the purchase is done below MSP. Any person or company compelling or pressurising farmers to enter into such an invalid contract will be punished with 3 to 7 years of imprisonment, or a fine of minimum five lakh rupees, or both. Both these Bills have not been enacted yet as they are awaiting the Governors’ assent.
How has MSP affected the cropping pattern?
According to the central government’s procurement policy, the objective of public procurement is to ensure that farmers get remunerative prices for their produce and do not have to resort to distress sale. If farmers get a better price in comparison to MSP, they are free to sell their produce in the open market. The Economic Survey 2019-20 observed that the regular increase in MSP is seen by farmers as a signal to opt for crops which have an assured procurement system (for example, rice and wheat). The Economic Survey also noted that this indicates market prices do not offer remunerative options for farmers, and MSP has, in effect, become the maximum price that the farmers are able to realise.
Thus, MSP incentivises farmers to grow crops which are procured by the government. As wheat and rice are major food grains provided under the PDS, the focus of procurement is on these crops. This skews the production of crops in favour of wheat and paddy (particularly in states where procurement levels are high), and does not offer an incentive for farmers to produce other items such as pulses. Further, this puts pressure on the water table as these crops are water-intensive crops.
To encourage crop diversification and thereby reduce the consumption of water, some state governments are taking measures to incentivise farmers to shift away from paddy and wheat. For example, Haryana has launched a scheme in 2020 to provide Rs 7,000 per acre to those farmers who will use more than 50% of their paddy area (as per the area sown in 2019-20) for other crops. The farmers can grow maize, bajra, pulses, or cotton in such diversified area. Further, the crop produce grown in such diversified area under the scheme will be procured by the state government at MSP.
