Question on MSP

Vijey asked:

1.Why is MSP (minimum support price) all the rage in India for farm products?
2.Is there no trust in the market mechanism leading to an organic price discovery?
3. Is our Market manipulated by Corporates leading to a distrust in this mechanism , since this seems to be the common discourse in the public domain?

There are various justifications that people provide for laws and regulations, including those related to agriculture. All laws and regulations have consequences that are seen, unseen, beneficial, harmful, intended, unintended, immediate and future. The world is a complicated place and it is hard to do only one thing — which I call the first law of ecology. When you do something, not just one thing happens; lots of other things happen — most of which are hard to anticipate.

One thing is certain. Any law, regardless of whatever other effects, has the guaranteed effect of reducing freedom. This is logically true because if the law did not in some way restrict the freedom of action, it would be pointless to pass such a law. There is no law that forbids a person from leaping across the Atlantic and get to New York city because no one can do that. But there are laws that prevent a person from boarding a flight to NYC without the proper travel papers.

Farm laws and regulations reduce freedom in farming activities. This may or may not be a good thing. The question that matters is “Who benefits from a particular law and at whose expense?”

Minimum support prices for farm products directly benefits farmers, and the cost is borne by consumers of farm products — either through higher prices at the market or through taxes. MSP could be justified to some degree to protect farmers from ruinous losses due to unanticipated drop in market prices. But MSP could — and often does — lead to distorted incentives. Farmers, knowing that their product will be bought at MSP will not be motivated to respond to market signals that would tell them to not plant too much, and thus produce stuff that is not demanded by consumers. This happens in India — too much is produced.

Really? Too much is produced you ask. Then why are people not getting enough to eat. That’s because a lot of the production rots between the farm gate and the general store.

As I already noted, the economy is a really complex dynamic system. Controlling complex dynamic systems is not a trivial task in general. In the case of an economy — the most complex and most dynamic system — attempts at controlling always ends in a huge mess, and often a total disaster.

But politicians and bureaucrats do like to control the economy. And their control unsurprisingly always benefits them and their cronies. That’s why the control the economy even though that imposes immense costs on everyone else.

What’s the alternative? The alternative is to stop controlling. Which is to allow the people to do what they think is in their best interest. Let farmers farm without imposing restrictions on them. Don’t mess with the prices of inputs (land, water, electricity, fertilizers, machinery) and don’t mess with the output prices.

Don’t subsidize farmers. Let farmers buy and sell their inputs and outputs in free markets. Did you that farmers are not allowed to buy and sell land in the free market? That’s one of the most pernicious anti-farmer laws. I estimate that that law has kept hundreds of millions of people poor, which then translates into keeping India underdeveloped and poor.

But then, you may ask, if that prohibition on the sale of land is so harmful to so many, why do those laws exist? It enriches the politicians, bureaucrats and their cronies. The cronies are the corporations that get special favors from the politicians and bureaucrats.

One of the assumptions of economics is the rationality assumption. It says that people have objectives (to get the most for themselves) and they use rational means to meet those objectives. Corporations too, given the chance to make unearned profits by bribing government officials, rationally choose to enrich themselves.

Here’s how I generally see it.

Since India is a socialist country, government control of the economy is by intent and design. Being in government gives one immense discretionary powers — to grant or deny licenses, to block and prevent legitimate economic activity, to extract rents wherever possible. Therefore political power translates into economic power. This politicizes the economy, meaning economic policies are dictated by what is politically expedient or what is most financially rewarding to the policymaker. That leads to poor economic outcomes.

Politicization of the economy then leads to the corruption and criminalization of politics because ultimately money determines who wins elections. The lesson here is that corruption is not just an unintended side effect but actually the designed objective of a command and control economy. [Source.]

The Indian government’s interventions in the economy is the primary reason why India has failed to prosper. That’s a topic we will discuss later in this course.



Author: Atanu Dey


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