New Delhi: The Modi government scaled up nationally a price protection scheme for farmers disregarding multiple internal warnings that it is prone to corruption and hard evidence from a disastrous experiment in Madhya Pradesh, reveal internal documents.

The scheme was launched despite warnings from states, including BJP-ruled Uttar Pradesh, that it was designed to help corrupt traders and not farmers. The Union government imposed it on states though the majority of them had spoken against it.

The price protection scheme, officially known as price deficiency payment system (PDPS), was the showpiece of the three-pronged PM Aasha scheme launched ahead of the 2019 general elections to protect farmers against wildly fluctuating prices of pulses and oilseeds. It promised to top up the earnings if farmers earned less than the government-fixed minimum support price (MSP).

The Union government adopted the price protection scheme from Madhya Pradesh despite the state government scrapping it within six months of launch. It was hobbled by a design flaw that allowed traders to rig prices.  

Now, official documents, including cabinet records, that have not been previously reported reveal the government rushed with the scheme despite Niti Aayog and a study, commissioned by the Centre to look into why the state scheme failed, recommended implementing safeguards and revising the model to prevent corruption before expanding it.

The government didn’t wait to rewire the scheme despite the majority of states opposing it, and instead, records reveal, dumped the responsibility on the states to keep the scheme clean despite design flaws.

Documents further reveal that the government rode roughshod over the internal concerns that the scheme excluded crores of tenant farmers, and hid another devil in the fine print: that it would only compensate losses for up to a quarter of the farmer’s produce. If a state wanted to compensate farmers for losses beyond a quarter of the production, it would have to foot the entire bill alone. The Union government would not provide any support. The scheme was designed to dissuade states from compensating farmers for their entire produce.

The internal documents show that while the government kept hammering in public about its intention to double farmers’ income, it was unsure if it really wanted to do so. Internally, the government remained jittery about the consequences of doubling farmers’ incomes – from increased purchasing power of farmers to inflation – documents reveal.

Such debates are common for economists. But the lack of clarity in the government on choosing between putting more money in the hands of farmers and preventing inflation, adversely affected farmers. Farmers were promised higher returns but then the government reneged on its commitment to suppress consumer prices of farm produce.

Narendra Modi’s government has faced a constant critique – that it first announces policy for political dividend and later formulates them. The overnight demonetisation of high-value currency in 2016 leading to economic chaos without delivering on any of the claimed goals fits this critique.

This investigation by The Collective shows how an impulsive policymaking nearly allowed corrupt traders to pocket public funds. But ultimately, the corruption-prone scheme was stopped in its tracks, not by reform, but by the government's own financial mismanagement.‍

The Collective sent detailed queries to the Union ministries of agriculture and farmers’ welfare, and consumer affairs but didn’t receive any response.

First, policy blunder

Beginning 2016, the Modi government began to nudge farmers to ramp up the production of pulses and oilseed because low production in the previous years had pushed up prices of these products in the market.

The Union government raised the minimum support price (MSP) for oilseeds and select pulses.  MSP is the price at which the government commits to purchase the produce from the farmers. An assured price from the government incentivises farmers to grow more.

Domestic production zoomed. Pulses production increased by 41.5% and oilseeds by 24% for the financial year 2016-17 when compared with the previous financial year.

In a move criticised by experts, the Union government then allowed the import of large quantities of both from the international market. Pulses and oilseeds flooded the Indian market. As a result, many farmers were forced to sell their produce in the open market at throwaway prices much below the MSP.

Adding sting to the whiplash delivered by the supply glut, the government demonetised over 80% of high-value currency overnight in November 2016. Farm trade at the primary levels happens largely in cash. So, the market for the oilseeds and pulses tanked further.

Farmers in Madhya Pradesh, the primary pulses and oilseeds centre in India, grew angry. After months of complaints of low prices, in June 2017, they took to the streets demanding that the government ensure better pay for crops. They wanted the government to pay the prices based on the calculation recommended by the 2006 National Commission for Farmers headed by MS Swaminathan, and waive off their debts.

The state government, headed by then Chief Minister and present Union Minister for Agriculture Shivraj Singh Chouhan, did not budge. The stand-off led to violent clashes between farmers and the police. On June 6, 2017, the police shot dead six farmers and wounded six more.

To calm the nerves of the farmers in the state just a year away from elections, the government announced the Bhavantar Bhugtan Yojana or the Price Deficiency Payment System in September 2017.

Under the scheme, the farmers had to sell their produce in the government-designated markets but the government would not buy the produce from the farmers. But if the market prices were below the MSP, the government promised to pay the difference between the selling price and the MSP.

The scheme ran for only six months and was abandoned by the state government. Traders had made a killing by rigging the scheme and the market price. The traders, knowing that the government would step in to compensate the farmers, colluded to buy the produce from farmers at very low prices. The government ended up footing a higher bill in compensating farmers for the difference between this artificially suppressed market price and the MSP. Experts and the opposition pointed out that the prices rose once the scheme was discontinued.

But even as the scheme was floundering in the BJP-governed Madhya Pradesh, the Modi government took a fancy to it.

Then Union Minister of Finance Arun Jaitley in his 2018-19 budget speech said, “It is essential that if the price of the agriculture produce market is less than the MSP then in that case the government should purchase either at MSP or work in a manner to provide MSP for the farmers through some other mechanism.”

“NITI Aayog in consultation with the central and state governments will put in place a fool-proof mechanism so that farmers will get adequate price for their produce,” he added.

Two weeks after the budget speech, the Union Ministry for Agriculture sent a letter to all states with three options for ensuring minimum support prices for farmers of pulses and oilseeds: 1) Decentralised procurement of crops at prices notified by states, with states being reimbursed for losses, 2) use price deficiency payment system, or 3) bring in private traders to buy crops at MSP.

Official records show that the government’s plan to implement PDPS across the country was based on the Madhya Pradesh model.

“The Madhya Pradesh scheme was flawed,” said Kavitha Kuruganti, a veteran farmers’ rights activist. “But Haryana has implemented the scheme much better. PDPS as an idea itself is not bad but the way Madhya Pradesh went about it was bad. Instead of measuring the price deficit for each farmer, the scheme can be designed like crop insurance schemes, with panchayats being the geographical unit” she added.

The Haryana government, also ruled by the BJP, implemented its own version of the PDPS. While the idea remained largely similar, Haryana’s scheme made improvisations that lowered the risk of cartelisation and excessive red tape.

But the Union government stuck to the corruption-riddled Madhya Pradesh model instead.

In March 2018, Niti Aayog, as directed by the government, held consultations with 22 states and four Union Territories about MSP models that can be implemented. Only 4 states agreed to implement PDPS while the rest rejected the idea. Uttar Pradesh was critical: “UP is not in favour of implementing PDPS (Bhavantar) due to the cartelisation issue, which may depress the evolution of real price.”

Here was a BJP-governed state warning that the scheme had led to corruption in another BJP-ruled state. It’s rare for governments to speak candidly about corruption, particularly if it is in a state governed by the same party.

A majority of other states too, were in favour of the model where the produce was actually procured from the farmers at the MSP declared by the states. The Centre would partially bear the cost of such procurement by the states.

Bizarre recommendation

Niti Aayog played both sides. It recommended scaling up the PDPS model while offering state governments the freedom to choose either PDPS or the decentralised procurement model.

Even as the Niti Aayog recommended the PDPS model it also noted that the scheme was susceptible to corruption and manipulation by traders. It acknowledged that the scheme was likely to fail in doing the one thing it was supposed to - raise farmgate prices of oilseed and pulses for farmers.  

“There is a possibility of price manipulation by the traders to take advantage of price gap paid by the government,” Niti Aayog acknowledged.

This was as candid an admission as a government makes in bureaucratic notings that it would end up lining the pockets of traders through a scheme meant to benefit farmers.

In the light of such admission, Niti Aayog’s recommendation to go ahead with the price support mechanism as an option was bizarre. Independent and credible experts had warned about the Madhya Pradesh model earlier too.

Niti Aayog reasoned in its notings that while the scheme may not help farmers, it certainly was cheaper than the other options the think tank admitted were beneficial to farmers.

In a paper published in April 2018 on the Madhya Pradesh scheme by former Union Agriculture Secretary Siraj Hussain along with researchers at the Indian Council for Research in International Economic Relations. They concluded that “the scheme is prone to manipulation by traders and lower level mandi functionaries, and may end up helping them more than the farmers, despite best intentions of the Government.”

But that wasn’t all. Besides the corruption, the researchers observed that only a fraction of the state’s farmers had signed up for the scheme. The scheme was not only riddled with holes but also had impediments for farmers to get any benefit. A cumbersome registration process to join the scheme stood in their way.  

Farmers had to first register on a website with details of land and ownership, Aadhaar number, bank account and the crop grown, that too, a limited choice of eight crops. Then sell their produce at specific government-notified markets (APMC) and report their sale prices to the government.

The Union government ignored evidence that the Madhya Pradesh model it was scaling up nationally was a fiasco, the advice of Uttar Pradesh, the reservation of majority of states and independent expert reviews pointing out loopholes.

The baton was now with the agriculture ministry, which soon gave the idea a formal shape. It proposed the ‘PM Aasha’ scheme. The details of the proposed scheme were circulated for inter-ministerial consultations.

PM Aasha was to be an umbrella scheme with three components: the first was the decades-old direct procurement scheme under which the Union government directly purchases farmers’ produce. The second was a PDPS scheme based on Madhya Pradesh’s Bhavantar Bhugtan Yojana and the third was a pilot scheme to test the viability of private players purchasing from farmers at MSP.

Surprisingly, what was missing was the decentralised procurement model that almost all states had wanted. The government didn’t explain why they abandoned this model, which most states said they preferred in its consultation with Niti Aayog. Instead, the government pushed the least popular PDPS model, which had been widely criticised by the states as flawed.

While the public procurement scheme was in existence since Congress era for decades with its own distinct budget, the private stockist scheme was envisioned as a limited pilot to be run in only eight districts across India. In effect, the only new scheme the government was introducing nationwide for the first time was the PDPS scheme - the corruption-riddled Madhya Pradesh model.

During the inter-ministerial consultations in April 2018, two ministries and the Prime Minister’s Office asked the agriculture ministry if it had evaluated the Madhya Pradesh scheme. In response the ministry said an evaluation by the Institute of Economic Growth was going on, and would submit the evaluation only in August 2018, weeks before the launch of PM Aasha.‍

Niti Aayog, which had been soft on the scheme initially, was now warning the agriculture ministry against the Madhya Pradesh model.

It told the government that the scheme would need “significant preparations” before being implemented nationwide. “Without these preparations, the scheme could have significant downside risks arising from a nexus between traders and farmers. This scheme also has a downward bias for agricultural prices.”

The agriculture ministry chose to pass the gatekeeping job entirely to the states.

“States has to (sic) strengthen their market and proper monitoring system has to be developed at State level. Handholding support can be provided by central government,” the agriculture ministry said in its response. It was expecting states, the majority of whom had shown no interest in the scheme to begin with, to implement it and fix the holes in it too.

The finance ministry wanted to know what will happen to sharecroppers who don’t own the land they till but bear the majority of the cost of farming. In India, a large majority of farmers work as sharecroppers, tenant farmers or agricultural labourers.

To avail of the government dole under PDPS, each farmer has to register with details of how much land they own and its details among others. Based on the average yield of the crop in the area, the government then calculates how much each farmer can produce.

The agriculture ministry, in response, admitted that the scheme won’t cover tenant farmers or sharecroppers. “The proposed scheme is not proposing a solution to challenges of tenancy/land leasing,” it bluntly replied.

The department of consumer affairs was worried that the PDPS scheme could suddenly drive up prices of goods and services by putting more money in the pockets of poor farmers.

“The inflationary impact of the proposed intervention should be minimized and such parallel interventions for such reduction in inflationary implications should be addressed simultaneously,” it said.

The agriculture ministry said that an “increase in MSP will be impacting food inflation” but couldn’t help it as the scheme mandate was only “to ensure MSP to farmers”. “Challenges of inflation”, it added, “will still remain”.

Even though the report received department-by-department recommendations, none of it was strong enough to make the government pause and rewrite the plan.

A research paper too, had gamed out how the scheme would look like in real life.

The costs of scaling up the Madhya Pradesh scheme nationally were analysed in a paper published by the Indian Council for Research on International Economic Relations in April 2018, 4 months before the launch.

They predicted two potential trajectories. The first, in which the Union government scales up the scheme nationwide and compensates farmers for price deficits across all crops – but the costs of this would be “staggering”.

The second scenario, they said, would be “half-baked implementation of the scheme”. “Here, the scheme will not cost a lot, on paper, one can say that the scheme was offered but nothing much will change on ground,” they added.

Eventually, the second scenario played out.

Designed to Fail

The Modi government had considerable knowledge about the drawbacks of the scheme and was privy to expert opinions, studies and post-mortem report of a dead scheme that predicted the problems. But it still pushed ahead.

About a month before the Modi government switched on the PM Aasha scheme, a study it had commissioned to evaluate the Madhya Pradesh PDPS fiasco arrived at the agriculture ministry.

It categorically reinforced all the earlier warnings against the PDPS.

The researchers pointed out that the scheme was intended to benefit “all stakeholders of agricultural marketing system” – referring to farmers, traders and even the government. “However,” they noted with caution, “the relative distribution of benefits is unclear.” This was an admission of the fact that some were being left out of the fruits of the scheme.

The study left no ambiguity on who had suffered: the farmers.

“The important problems of BBY (Bhawantar Bhugtan Yojana) include inclusion and exclusion errors, complex and lengthy procedures, delay in payment, lack of quality control, and potential risk of price manipulation mainly by traders,” it added.

While all governments are prone to ignoring independent voices, here was a report commissioned by the government warning against the idea it had given legs to. This should have got some attention even from a government intolerant to external critiques. It did not. Instead, it was completely ignored.

The government soon launched PM Aasha, a copycat version of the failed and corruption-riddled Madhya Pradesh model.

Its guidelines, reviewed by The Collective, are similar to those chalked up by the Madhya Pradesh government for the Bhavantar Yojana. The Union government put a 25% cap on the compensation, and restricted the fruits of the scheme to only farmers selling crops in government-designated markets (APMC), in effect limiting the outreach by design.

“At an all-India level, only a small part of produce is sold in APMCs. So, PDPS is not possible in most cases,” said Siraj Hussain, the former agriculture secretary and co-author of the ICRIER paper on Madhya Pradesh’s PDPS.

According to the government data, over 60% of the country’s produce is sold outside of government-regulated markets or APMCs. Meaning, the majority of the farmers’ sales are not formally registered in the country to begin with.

Incompetence comes to help

Ironically, what saved the country from the scheme and the attendant corruption was the Union government’s fiscal incompetence. For several years the government did not have the money to fund the scheme.

As previously reported by The Collective, spending on PM Aasha plummeted after its launch, with zero expenditure for two consecutive financial years, before rising again with the 2024 Lok Sabha polls around the corner.

To mask underfunding, the government made an accounting trick that shifted the spending of the decades-old UPA-era direct procurement scheme to PM Aasha. So, thousands of crores spent on direct procurement was seen as a success of PM Aasha when the government had actually spent nothing on its PDPS component.

When pulled up for the lax implementation of the scheme by a Parliamentary Standing Committee on Agriculture, the Union government blamed a “lack of demand from states” for the failure of the scheme. The committee promptly rapped the government, saying the fact that the scheme hadn’t taken off was a sign of poor design.

People’s money may have been saved this time around from pilferage because the state governments (including those governed by the BJP) ignored the crummy policy option pushed by the Union government.