Case Study - How mandatory MSP will open flood gates for imports and will create more problems for Indian Farmers and Agriculture?
Current Minimum Support Price (MSP) Model no more relevant for Farmers' Income Security
Case Study: Soybean
Let us look at the facts:
India is a deficit in edible oils, it means there should be demand for oilseeds in India. Soybean is the largest oilseed crop in India. Today, India is importing 70% of edible oils of her requirements from the world market.
Let us build a case around soybean as see what is the future of MSP in India.
Why Soybean as an example?
India needs edible oils to reduce dependency on imports. It means there is a huge market for edible oils in India. Even if the government is not buying soybean, millers will buy soybean and consumers will buy the soybean oil.
The key concerns are:
If farmers are poor, 60% of consumers are also poor. At what price Consumers will buy edible oils?
Like farmers, every small business has a right to make a profit in business. They need edible oils at lower rates. They will buy the cheapest oil for their requirements.
- Can India export edible oils to the world market so that farmers can make a profit?
- Can India farmers supply the edible oil at the price which is affordable to consumers?
If not, how much subsidy will be required to ensure that edible oils made from soybean of India farmers so that farmers and consumers both are happy?
The ground reality which soybean farmers have to face in the coming days:
According to FAO data, Over 40% of world soybean production is traded internationally, a high share compared to other agricultural commodities.
Compared to the previous decade, the expansion in world soybean trade is expected to slow down considerably during the outlook period. This development is directly linked to the projected slower growth of the soybean crush in China and subsequent imports.
What will be its implication on India?
We will discuss that in the latter part of its article. Chinese soybean imports are projected to grow by 1.8% p.a. to about 105 Mt by 2029, accounting for about two-thirds of world soybean imports. Exports of soybeans originate predominately from the Americas – the United States, Brazil and Argentina – and are projected to account for a stable 88% of world soybean exports by 2029.
By 2029, it is projected that Brazil will account for 48% of total global exports of soybean, 1 percentage point higher than currently. This means there is no hope for world soybean market prices to go up substantially.
Can Indian farmers export soybean to the world market?
Now, let us look at facts and discuss the way forward.
Soybean production in India:
According to Crops Division of Ministry of Agriculture, GOI, Soybean area in India 11 to 12 million hectares, the average yield of the soybean crop in India is about 1.00 to 1.10 tons per hectare.
Let us compare with the competing countries:
According to the provided information, it is clear that India is not a dominant player in the soybean world market. India is neither major produce nor a major consumer of the soybean crop. It means we have no say in the world market. We have to accept the world market conditions.
How Indian farmers can bear the shocks of the world market?
The only way Indian farmers can absorb the shocks of the world market is by becoming the most efficient producer of soybean.
The fact is the world average is 2.8 tons per hectare whereas we Indian farmers' average productivity is only 1.1 tons per hectare. The fact is the world average yield will increase to 3.11 tons per hectare by 2029.
What will be Indian soybean farmers' average productivity by 2029?
According to the same estimates, India's average productivity will be between 1.3 to 1.4 tons per hectare.
It means neither India will be the big producer of soybean, nor Indian farmers' will the most efficient producers of soybean. Neither farmers' leaders are suggesting how to improve productivity, nor state governments have any benchmarking and time-bound plan to improve soybean productivity. Please note agriculture is a state subject. Now, soybean farmers' have to think, how to improve their income in future?
The simple option advocated, by many shorted sighted planners and leaders, is increase the MSP.
What will happen if we continue to increase MSP?
Let us discuss, why this will be a disaster from the farmers' point of view.
In the last 20 years, India increased MSP. It was good decision till now. Every economic policy has its own limitation. Today we are at a situation that now there is no more scope to increase MSP to increase farmers income. Beyond a point, MSP will destroy not only soybean farmers but also farmers of poultry, other oilseed farmers and other allied activities. Please do not feel agitated, please see the hard facts.
What will be the estimated world market price in the coming years?
According to the authors' analysis, the projected international prices will remain marginally lower than projected MSP when Indian currency is at Rs.70 against the dollar. This is a dangerous situation.
What are the risk factors for soybean farmers?
I want Indian farmer leaders and Policymakers to seriously look at these options and plan for it.
1. Aatamnirbhar Bharat is a threat to soybean farmers: If Indian economy revives in coming days and exports of other products will improve, Aatamnirbhar Bharat will become a success, then the exchange rate will be lower than the current rate. With every rupee improvement in the exchange rate, import of soybean is likely to go up. It will be cheaper to import than buying from India farmers and dealing with all the corruption on the way at various points. A strong economy means strong rupee. means more imports at the same international price. Should we stop Aatamnirbhar Bharat or growth of the Indian economy to save soybean farmers?
2. If the world soybean market crashes due to growing palm cultivation, the inflow of soybean will increase in the Indian market: Every government in the world is planning how to increase productivity with the help of technology, the production is growing future than the demand. Any reduction in world prices will increase the flow of soybean into India and will hurt Indian farmers prices.
3. India cannot go back to international commitments unilaterally: Some wise people may suggest, increase the import duty. In the WTO era, these duties are the outcome of negotiated terms and conditions. If India wants to increase the import duty on soybean, then please tell us which sector or crop of India should be sacrificed. For which crops Indian should reduce the import duty. Should we do it for wheat, rice, sugar, cotton, steel, textile, software, etc etc, Please name the sector which sector India should kill to save soybean farmers? The same logic will apply to other crops as well.
What is the future of soybean farmers in the current situation?
It will be useful for all the farmers' leaders to give a concrete proposal with calculations, not just opinions, to understand their action plan. You may ask, what is my proposal or suggestion.
My suggestions are:
1. Focus on Productivity: Please not accept any technology of ICAR or any company, if yield growth is less than 20% every year. Anything less 20% will not help farmers in making money because the technology provider will also charge a premium of the technology.
2. Do not temper with MSP: As per projected calculations, any increase in MSP will open flood gates for soybean into India. India has a duty free import agreement from Africa. Even today, more 1,50,000 tons of soybean is already imported from the world market last year at lower than MSP from Africa. Higher the MSP, more the incentive to import.
3. Treat soybean as protein crop, not as oilseed crop: Incentive should be on protein utilization, not on oil production. Protein gives more opportunity for value addition and innovation. These protein-based products can be exported at a higher price than oil or oil meal. Edible Oil is a cooking median, cheapest oils will be preferred by all food companies and restaurants, because all food companies work for profit only, not to promote health and nutrition in society. Health and nutrition are just incidental benefits and good for advertisement and branding. This needs serious thinking and planning.
4. Promote by-product utilization like Soybean meal by supporting livestock sectors: If planned properly. soymeal is more profitable than the edible oil business. Soy protein gives better value. Oilseed business with increased MSP has no future. Even today, it is cheaper to import edible oils. In coming days, with incase in MSP, even raw material will be cheaper to import.
Who will buy crop of Indian farmers? Even if for political reasons, the government will decide to buy all agriculture produce from farmers and sell at subsidised rates. Who will fund this activity? No one is keen to pay the additional tax?
Options :
1. Should we increase GST on all products?
2. Should we increase income tax on all people, only 1.5 crore people pay tax?
3. Should we tax farmers with more than 5 acres of land to generate funds to support smaller farmers?
4. India is not a rich country. Should we stop all subsidies in all forms and just buy the crop at MSP? We do not have funds to give free inputs and subsidise outputs as well.
5. Focus on productivity, so that farmers can make more money without increasing MSP.
You all may have better ideas, please do share.
Feel free to share your comments and views in the comments section below.
Dear Vijay. I believe your report is the first one I have seen in the last 10 years stating reality of the Oilseed scenario in India. What you have written will happen and there is no other way I see the market change. The consuming class is bearing the burden of farmer subsidy but I am quite sure that the Indian farmer may now only be consuming the cheaper edible oil as his own seed makes for an expensive oil which he cannot afford.
ReplyDeleteThanks for bringing out the reality of the Oilseed Industry.