Beyond Politics: The Economic Realities Of The Farmers' Protest In India

In India, the year 2020 was marked by the powerful and impactful Farmers' Protest that saw farmers from various states coming together to voice their concerns against the government's three new farm laws. Fast forward to 2024, and the Farmers' Protest is back, with the farmers once again mobilizing themselves and this time traveling to New Delhi to make their voices heard. This protest, coming in the year of the general elections in India, holds significant economic implications, calling for a closer examination of its broader economic aspect beyond mere political posturing. Amidst various demands that farmers have put forth, such as debt waivers, electricity subsidies, pensions, etc., the central demand that stands out is the establishment of a Minimum Support Price (MSP) for all 23 crops. Currently, only rice and wheat are procured at MSP by the government. This poses a great challenge for farmers engaged in cultivating other crops, as they are left vulnerable to market fluctuations, often resulting in significant financial losses. Extending the MSP to all 23 crops has been one of the most vocal and persistent demands of the protesting farmers. The aim is to provide them with economic security and a safety net, ensuring that their efforts in cultivation are not met with financial ruin due to factors beyond their control, such as adverse weather conditions or sudden market downturns.

However, the implementation of MSP for all 23 crops poses significant economic challenges for the government. Estimates suggest that this could create a financial burden of approximately 10 lakh crores on the government, which is nearly equivalent to the expenditure on defense. Should public funds, which are essential for critical infrastructure development and attracting Foreign Direct Investment (FDI), be redirected towards MSP? This question raises a series of economic concerns. The potential impact on FDI, infrastructure projects, and the defense expenditure must be considered. If funds are reallocated towards MSP, it could lead to a slowdown in infrastructure development, affecting economic growth. Additionally, a diversion of funds from defense could compromise national security. Furthermore, there are broader economic implications of extending MSP to all crops. A fundamental economic principle states that when prices are artificially fixed above market equilibrium levels, they create market distortions. This can result in overproduction, as farmers are incentivized to produce more of the crop than what the market demands. This leads to a surplus, causing downward pressure on prices and revenue losses for farmers.

An extended MSP could also lead to an increase in input costs, as farmers might be tempted to use more expensive inputs to increase output and secure higher MSP prices. Additionally, the government's procurement of surplus crops at MSP could create a situation where it becomes the sole buyer in the market. This could result in a lack of competition, which is necessary for an efficient market. This lack of competition might lead to inefficiencies and increased costs. Moreover, the MSP-based procurement system could potentially lead to a misallocation of resources. Farmers may shift their focus towards crops that are supported by MSP, rather than the ones with the highest market demand. This could result in an overproduction of certain crops and scarcity of others, leading to market inefficiencies and loss of consumer welfare. The government's procurement at MSP could create storage and distribution challenges. If the government ends up buying more than what is needed, it would have to store the surplus crops. This would require significant storage infrastructure, which may not be available. Moreover, distributing the surplus crops efficiently across the country could also pose logistical challenges. Another critical concern is related to fiscal implications. If the government procures crops at MSP and sells them in the market at a price below MSP, it would incur losses. These losses could be covered by increased taxes, reduced spending on social welfare programs, or borrowing. Increased taxes would be unpopular and could dampen economic growth, while reducing social spending would be socially undesirable. Borrowing would increase the fiscal deficit, leading to inflationary pressures.

In conclusion, while extending MSP to all crops seems like a noble and equitable goal, it presents significant economic challenges. The trade-offs involved, such as the diversion of funds from critical sectors, market distortions, input cost increases, and fiscal implications, need to be carefully considered. A balanced approach, perhaps involving a refinement of the current MSP model, is necessary to address the farmers' concerns while ensuring broader economic sustainability. This necessitates a constructive dialogue among all stakeholders to find viable solutions.

*This article is authored by Arjun Gupta , Chief Financial Officer, Lawpinion and reviewed by Sparsh Narayan , Chief Editor, Lawpinion . Views expressed are personal.