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MSP is a State Supplied Drug

... and the government is the drug dealer.

Through the government mandi system, the state is also participant in the market. The state being one of the sole purchasers of farmers’ crops (and obviously the law setters), they have immense price-setting power also. However, the incentives are slightly different for the state since they need to ensure their own political reputations and secure vote blocks. Due to this, and also having all their costs paid for through taxpayer’s money, there is little incentive to keep costs low. As a result, the state’s maximum price, unlike businesses, is not set at the lowest possible. They instead aim to set the prices manually to a level where they balance an adequate price for farmers and consumers.

However, these sorts of price control policies are almost universally agreed by economists to be an ineffective strategy to set prices and leads to faulty outcomes

[1]⁠

. But to see why, lets briefly go over how prices are naturally set through the laws of supply and demand.

The law of supply states that at higher prices, sellers will supply more. The law of demand states at higher prices, buyers will demand less. These laws can be represented graphically in Figure 3, with a downward sloping demand curve and an upward sloping supply curve. The point at which these two curves meet is known as the equilibrium, natural market price.

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This is the point where the most suppliers and consumers are willing trade with each other. Different factors can affect this equilibrium, causing either movements along or shifts of these curves entirely. For example, a meteor hits a region, temporarily restricting the supply of wheat. With this, the price would have to go up as the demand remains the same for a now rarer good. This higher price would then give an incentive for new entrants to come into the market and supply that good in order to secure a higher income. As this happens, the supply rises back to the normal level as these new suppliers grow more wheat, re-establish the logistics and compete with each other. Therefore, this brings the price back to the natural rate as the supply gets closer to the consumer’s demand.

So what happens when government sets the price rather than the market? Figure 4 shows the effect of setting a price ceiling (i.e a maximum price suppliers cannot sell above) that is below what the market price would have been. As a result, the incentive to produce so much diminishes as there is no profit in it for the supplier

[2]⁠

. This then leads to shortages as the quantity supplied does not meet the quantity demanded by consumers.

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Figure 5 shows what is currently being employed by the government in India using the minimum “support” price (MSP). By setting a price floor (a minimum price a good must sell for) that is above the natural market price through having the government guaranteeing purchases, then the incentive is just to produce as much as possible regardless of actual consumer demand.

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Initially, this may not seem like such a big issue since it would just result in surpluses, and you may think it’s better to have too much than too less. However, consider the reality here. The ecological situation in Punjab is a disaster. By having the government guarantee income through ecologically unsustainable crops, the farmers will just keep growing them. For example, growing rice is a very water intensive process that has never really been in the traditional farming culture in the region

[3]⁠

. However, due to the incentives established through government price controls, rice cultivation is widespread and consequently the water table in Punjab is drying up with estimates suggesting that the land will be classed as a dessert by 2040

[4]⁠

Despite efforts to educate farmers about the environmental issues

[5]⁠

, the MSP and mandi system have made them reliant on the government for their income. The central government has developed an insane amount of power over the financial security of the farmers. Whilst initially it may have sounded great politically telling farmers that the government will provide a safety net through always guaranteeing them income for what they grow

[6]⁠

, the unforeseen consequences of this are being realised today. Now farmers are extremely reliant on the MSP and fear the risks of its removal. We can’t really blame them for this either at this point, since by removing it now would be disastrous without an alternative safety net in place. The whole situation is akin to a heroin dealer giving you the first dose for free, knowing you will come back for more soon. Alongside the already existing drug epidemic in Punjab, reliance on the state is another drug, and we are all addicted.

Lastly on this point, the government is only able to guarantee a minimum price by buying up all the excess produce. Forgetting for the moment that tonnes of this never goes on to sell to end consumers and rots in warehouses

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, they can only do so with taxpayers money!

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The citizenry therefore, pays twice for their food. Once through buying it from markets, and secondly through taxes.

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Endnotes

See

The Azadist Approach⁠

for what demand we can replace MSP with that may work better to secure the livelihoods of people, but not at the expense of market prices.

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[1]⁠

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Link:

The Consensus on Price Controls - Econlib⁠

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Raw: https://www.econlib.org/the-consensus-on-price-controls/

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[2]⁠

Now many of you reading may have a cynical attitude towards profit, however, all that profit does is indicate how much income you receive compared to costs incurred to generate that income. If the income outweighs the costs, then that’s a profit. This profit is what is used by a farmer, or baker, shop-owner etc to feed their families, invest in their enterprises and buy goods and services. If they can not generate a profit, why would they carry on if everything they produce they makes a loss? Unless this is a charity, it is only rational for them to produce less of a loss-incurring good.

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[3]⁠

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Link:

Punjab: A tale of prosperity and decline (columbia.edu)⁠

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Raw: https://news.climate.columbia.edu/2009/07/28/punjab-a-tale-of-prosperity-and-decline/

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[4]⁠

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Link:

Panjab can become a Desert State in 20 Years (asiasamachar.com)⁠

Raw: https://asiasamachar.com/2020/04/03/panjab-can-become-a-desert-state-in-20-years/

Also worth noting is the mention of the Green Revolution in this article. Although this essay won’t go into it in detail, the following comment in the linked article hits the nail on the head:

“Lack of diversification of crops, market-driven sowing of paddy (rice) and supply of free electricity by the government to extract groundwater to irrigate paddy fields is one combination which means short-term gains but the ultimate demise of the proverbial goose which lays the golden eggs.”

Again and again, Azadism stresses the dangers that come with the lack foresight common with central-planning and allowing the state to intervene so heavily in the economy. The intentions may have been good and appear positive politically at the time, but the unforeseen consequences are being realised now.

Also, worth watching as mentioned in the article:

Link:

FINAL ASSAULT | Punjabi Documentary Film | Save Punjab Waters - YouTube⁠

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Raw: https://www.youtube.com/watch?v=-2_Viws3Ang

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[5]⁠

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And indeed there has been some great effort, EcoSikh is one such example:

Link:

EcoSikh⁠

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Raw:

https://ecosikh.org/#⁠

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[6]⁠

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Alongside subsidising fertilisers, pesticides, seeds and electricity.

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[7]⁠

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Link:

Food grains rot in India while millions live with empty stomachs | The Interpreter (lowyinstitute.org)⁠

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Raw: https://www.lowyinstitute.org/the-interpreter/food-grains-rot-india-while-millions-live-empty-stomachs

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[8]⁠

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Or inflation of the money supply, which is also incredibly detrimental to savings and purchasing power of the citizenry. If taxes are armed robbery, inflation is a more insidious theft.

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Bunga Azaadi — Institute for Azadist Studies

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