Over the past three decades, a major rationale offered in favour of liberalising Indian agriculture was that farmers were “net taxed”. In other words, incomes of farmers were kept artificially lower than what they should have been. It was argued that this “net taxation” existed because protectionist policies deprived farmers of higher international prices, and the administered price system deprived farmers of higher domestic market prices. If there were more liberal domestic markets and freer global trade, prices received by farmers would rise.
These arguments are raised again in the debates around the three farm laws. According to this view, farm laws are necessary to end the net taxation of agriculture. For this purpose, data on Producer Support Estimate (PSE) are used. A recent study found that PSE in Indian agriculture was -6% between 2014-15 and 2016-17. In contrast, PSE was +18.2% in the Organisation for Economic Co-operation and Development (OECD) countries, +19.6% in the European Union countries and +9.5% in the U.S. The farm laws would weaken restrictive trade and marketing policies in India and “get the markets right”. This, in turn, would eliminate negative support and raise farmers’ prices.
In these debates, a common example cited is that of milk. There is no Minimum Support Price (MSP) in milk, and a substantial share of milk sales takes place through the private sector, including multinationals like Nestle and Hatsun. Yet, India’s milk sector is growing faster than the foodgrain sector. If the milk sector can grow without MSP and with private corporates, why cannot other agricultural commodities? This article attempts a closer look at these claims.
PSE and its estimation
The PSE is estimated using a methodology advocated by the OECD. The OECD defines the PSE as “the annual monetary value of gross transfers from consumers and taxpayers to agricultural producers, measured at the farm gate level, arising from policies that support agriculture…” The PSE has two components. The first is market price support (MPS). MPS is that part of the gross transfers to producers arising from “a gap between domestic market prices and border prices of a specific agricultural commodity”. The second is budgetary transfers (BOT). BOT includes all budgetary expenditures on policies that support agricultural production. PSE is the sum of MPS and BOT, expressed also as a percentage of the value of agricultural production.
The PSE for Indian agriculture in 2019 was ₹-1,62,740 crore, or -5.5% of the value of production. Within the PSE, the MPS was negative while BOT was positive. The MPS was ₹-4,61,804 crore, or -15.5% of the value of production. The BOT was ₹+2,99,064 crore, or +10.1% of the value of production.
The MPS for a commodity is calculated as the product of its annual production and the difference between its international and domestic prices. The problem begins here: the international price is considered a benchmark with no reference to the actual possibilities of domestic producers obtaining that price.
Let us assume a commodity ‘A’ whose international price is higher than its domestic price. First, ‘A’ may be produced in large quantities but may also be essential for domestic food security. Hence, it may not be regularly exported. Yet, its MPS will be negative. Examples are rice and wheat in India. Second, most of the short-term changes in MPS may be illusory if they result from short-term fluctuations of international prices or relative exchange rates, or shocks to global demand or supply. Such fluctuations are more pronounced in agriculture because international agricultural markets are infamously imperfect, narrow and dominated by monopolistic multinational companies.
Third, if a country starts exporting ‘A’ to benefit from higher international prices, will the differential between international and domestic prices remain? In mainstream trade literature, a “small country assumption” is used where all countries are assumed to be price-takers and no single country is considered capable of triggering a major rise or fall in prices. But this is an unrealistic assumption. The international market for most agricultural commodities is small, while countries like India are large producers. Even if India exports a small additional share of the production of ‘A’, its impact on the international prices of ‘A’ will be disproportionately inverse. Consequently, the differential between domestic and international prices would considerably narrow, if not simply disappear.
Due to such fluctuations in MPS, the PSE also fluctuates widely. The PSE for Indian agriculture was +1.9% in 2000. It fell to -14% in 2004, -20.4% in 2008 and -27.8% in 2013. Afterwards, it rose to -3.8% in 2015 and -5.5% in 2019. These fluctuating PSEs mean nothing in terms of taxation or subsidisation of producers. They only mean that international prices were volatile.
In summary, the MPS is a wrong measure of taxation in agriculture because the international price is no “true price” to be accepted as a benchmark. Further, a negative MPS, by itself, implies neither a government that squeezes revenues out of farmers nor the absence of absolute profitability in agriculture.
The case of milk trade
Proponents of farm laws use the OECD estimates of MPS and PSE to show the perils of restrictive markets. By the same logic then, if the increasing penetration of private companies and the absence of MSP in milk are positive features, we should expect positive and rising MPS and PSE for milk. However, milk had the highest negative MPS among India’s major agricultural commodities in 2019. The MPS for milk was ₹-2,17,527 crore, which accounted for about 47% of the total MPS in agriculture. As a share of its value of production, the MPS for milk was -37.5%. Thus, if we go by the OECD estimates, milk was one of the most heavily “taxed” agricultural commodities in India.
Consider the period between 2015 and 2019. If the growth of private firms in milk trade was a positive change, the MPS for milk should have increased over this period. In 2015, the MPS for milk was positive at ₹16,190 crore. But in 2016, the MPS turned negative at ₹-57,223 crore and by 2019 it fell further to ₹-2.17 lakh crore. In other words, “taxation” of milk producers intensified between 2015 and 2019.
In reality, the MPS for milk turned negative not because of any compression of domestic prices. In fact, the average domestic price for milk rose from ₹25,946/tonne in 2015 to ₹28,988/tonne in 2019. But the average international reference price for milk rose faster from ₹24,905/tonne to ₹39,884/tonne in 2019. This led to a rise in the price differential from ₹1,041/tonne in 2015 to ₹10,896/tonne in 2019.
To argue from the above that India’s milk producers were “taxed” is as meaningless as arguing that India’s farmers as a whole were “taxed” to the tune of ₹4,61,804 crore in a year. The reason is that the OECD methodology, either for milk or for other commodities, does not offer any realistic assessment of the extent of taxation or subsidisation.
The lack of logic in debates
But these issues do not seem to bother the advocates of farm laws in India. In the debates, it is telling that these advocates (a) use the OECD estimates to highlight the overall negative MPS for agriculture as a problem; (b) but conveniently remain silent on the negative MPS for milk; and (c) yet, argue in the same breath that milk producers have benefited from the growth of private firms. The absence of logic in this line of argument is nothing but appalling.
In fact, what is missed in these debates is the elephant in the room: the BOT. The West’s PSEs in agriculture are positive and higher than India’s because they have higher BOT than in India.
R. Ramakumar is Professor at the Tata Institute of Social Sciences, Mumbai
