Protecting growers’ interests
The government is trying to take care of the interests of cotton farmers through MSP operations. MSPs are decided after taking into account production costs and reasonable profits that farmers should get and announced at the beginning of the cotton season. If prices in any part of the country go below the declared MSP, government agencies start procuring cotton at MSP. In addition to delivering higher prices to the farmers, MSP operations also help stabilise market prices around the MSP levels or above them. Since the procured cotton has to be disposed of at market prices, MSP operations do often lead to losses to the procurement agencies, which are ultimately reimbursed by the government.
In fact, MSP is a distress redress mechanism to help farmers when the market does not offer remunerative prices. But it has negative effects too. MSP pushes up cotton prices and makes the textiles industry uncompetitive to that extent. Usually, there are complaints against both the procurement operations and disposal of procured cotton. For the government, it is an expensive proposition. If the market price is lower than MSP by ?2,000 per candy and the government agency procures cotton at MSP, the total expense for the operation will be not less than ?4,000 per candy. In other words, ?2,000 is the additional cost of delivering a benefit of ?2,000 to the farmer.
“If there is a more efficient and less expensive alternative for delivering such benefit to the cotton farmers, it will obviously be helpful to farmers, textiles industry and the government,” contends D.K. Nair, secretary general, CITi. “Delivering a subsidy to farmers through a direct benefit transfer (DBT) scheme appears to be a viable alternative to MSP operations”.
“Even a country like China has started providing subsidies to cotton farmers directly from last year,” explains Sanjay Jain, managing director, TT Ltd. “It has learnt the lesson the hard way, as it had to incur heavy losses under its earlier policy”.
In the prevailing system, cotton growers are mostly selling their
Patodia: need long-term policies
produce in different cotton producing states through Agricultural Produce Marketing Committees (APMC). Seed cotton is brought to the market yard and sold under the supervision of the committee. The buyer of seed cotton is required to pay a fee to it too, which varies from 0.5 per cent to 2 per cent and the state tax (VAT) of about 5 per cent on the value of the seed cotton bought by him.
As such, the cotton grower and buyer can be identified by tracking these payments. A direct payment could be a mechanism to pay a subsidy (calculated as the difference between MSP and the price at which the transaction takes place) directly to the cotton grower. In the DBT scheme, government’s operational expenses will be negligible, compared to the huge cost of funding MSP operations. Subsidy can be paid to the farmers at the market yard itself, on production of the receipts for the fee paid to the APMC and the VAT paid to the state government.
“In addition to a substantial reduction in the cost to government for delivering the financial benefit to farmers, DBT has several other advantages. The most important one is that farmers will get the benefits without any hassle or delay, right at the time of selling the cotton,” says T.P.S.
Narang, former director, PEC Ltd and a farm sector analyst.
In an MSP operation, quality of cotton takes a beating as the government agencies are not equipped to adequately stock the procured cotton as they also lack the desired skill of ginning and pressing. “By transferring the benefits directly to farmers, deterioration of cotton quality during ginning, pressing, and warehousing by MSP operators as also disputes on grading of cotton can be avoided,” says Shirish Shah, Partner, Bhaidas Cursondas & Co.
Timing and pace of the disposal of procured cotton and prices at which such cotton is offered for sale are major irritants in the current MSP operations and these are less likely in the DBT scheme. Seed cotton will be available in the open market and its price will be derived freely by the market forces of demand and supply. Inadequate availability of cotton in the areas where substantial procurement operations take place is another complaint that will be avoided. There are widespread complaints of ‘informal’ cotton trade against cash payment at present. The DBT scheme would discourage this practice substantially, since there would be no benefit on such transactions.
However, there are challenges to be addressed for proper implementation of a direct benefit transfer scheme. For example, if the compensation offered is more than the total of APMC fee and VAT, there is a possibility of the same cotton getting transacted twice, leading to double payment under the scheme. Timely payment within the premises of the market yard will have to be ensured for the efficacy of the scheme.
It will also be necessary to limit the scheme to areas where cotton prices decline significantly. Proper monitoring will be required to address these and other issues that may arise. But apparently, there is a case for the government to seriously consider this alternative, even as infrastructure of agencies like CCI can be used to focus on issues like improvement in cotton productivity, quality and processing.
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