Look at Telangana: Another cautionary tale of MSP model’s perverse incentives. But there’s a way out


A political war is underway in Telangana between the TRS government and BJP, with CM K Chandrashekar Rao recently staging a public dharna in Hyderabad. The proximate cause for it is a dispute between the state and GoI over the procurement policy for the rabi agricultural season. Details aside, the development is important because it encapsulates the political economy underpinning the latest trends in India’s gargantuan MSP-driven cereal procurement exercise. The spotlight has been on protesting farmers at Delhi’s periphery, largely from Punjab, Haryana and UP. However, it is developments in other states that explain the challenge better.

Telangana and MP are the states with the largest number of beneficiary farmers in the paddy and wheat procurement drives respectively. Along with others such as UP, Odisha and Chhattisgarh, they are locations of a significant chunk of incremental procurement over the last five years. Two overarching trends are driving it. Operational risks in farming have increased with higher frequency of extreme climate events, nudging farmers towards MSP crops to de-risk. Concurrently, it influences political incentives of CMs, irrespective of party affiliation. GoI data brings it out.

Between 2015-16 and 2019-20, in rice procurement the top performers in terms of growth were Telangana at 243% and UP with 72.6%. In 2020-21, about 95% of MSP beneficiaries in Telangana were small and marginal farmers. In wheat, MP topped in beneficiaries at 1.7 million last season, followed by UP. A staggering 99.1% of MP’s marketed surplus of wheat was procured at MSP, 15 percentage points higher than Punjab. MP’s wheat market is effectively nationalised.

There’s clearly a misalignment of political incentives between states and GoI, which foots the food subsidy bill and has to take a long-term view of Indian agriculture. The problem, therefore, is not of cynical choice but of political economy incentives.

Economic reforms have two features. Typically, costs are borne upfront and benefits follow. Second, stakeholder buy-in requires an alignment of their incentives with a policy’s goals. In simple terms, reforms cannot fulfil their potential without accounting for transition costs. Here, GST’s introduction holds lessons. Years of talks reached fruition when states were guaranteed compensation for a five-year transition. Agriculture reforms are doable because all the major parties understand the need. If that has to be translated into reality, reform design has to account for the costs that stakeholders need to bear during the transition. If GST’s grand bargain received support, so can reforms of agriculture.

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This piece appeared as an editorial opinion in the print edition of The Times of India.



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