Understanding and Extending MSP | 14 Dec 2021

After more than a year, farmer unions have finally decided to call off their protests following the repeal of the three farm laws. The Government has also conceded to the demand of the unions to set up a committee to ensure minimum support prices (MSP) for all farmers.

The MSP for key agricultural commodities has been a persistent sticking point in the negotiations between the government and the farmers.

However, even an efficient and functional MSP is unlikely to be the permanent solution to the deep-rooted crisis in agriculture which suffers from low investment, absence of state support and inefficient management of the economy.

Minimum Support Price (MSP)

• About MSP: By definition MSP is not an income support programme, rather, designed to be used as a government intervention to stabilise prices and provide remunerative prices to farmers.
  • It is a public procurement programme to meet the requirements of the National Food Security Act (NFSA), 2013.
• Need for MSP:
  • The twin droughts of 2014 and 2015 forced the farmers to suffer from declining commodity prices since 2014.
  • The twin shocks of demonetisation and the rollout of GST, crippled the rural economy, primarily the non-farm sector, but also agriculture.
  • The slowdown in the economy after 2016-17 followed by the pandemic further ensured that the situation remains precarious for the majority of the farmers.
  • Higher input prices for diesel, electricity and fertilisers have only contributed to the misery.

Issues Associated with India’s MSP Regime

• Limited Extent: As against the official announcement of MSP for 23 crops, only two, rice and wheat, are procured as these are distributed in NFSA. For the rest, it is mostly ad-hoc and insignificant.
• Ineffectively Implemented: The Shanta Kumar Committee, in its report in 2015, stated that only 6% of the MSP could be received by the farmers, which directly means that 94% of the farmers in the country are deprived from the benefit of the MSP.
• More of a Procurement Price: The current MSP regime has no relation to prices in the domestic market. Its sole raison d’être is to fulfil the requirements of NFSA making it effectively a procurement price rather than an MSP.
• Makes Agriculture Wheat and Paddy Dominated: Skewed MSP dominated system of rice and wheat leads to overproduction of these crops and discourages farmers to grow other crops and horticulture products, which has higher demand and subsequently could lead to increase in farmers income.
• Middlemen-Dependent: The MSP-based procurement system is also dependent on middlemen, commission agents and APMC officials, which smaller farmers find difficult to get access to.

Way Forward

• Understanding the True Spirit of MSP: A price intervention scheme is not unique and is a standard intervention used by many countries. A true MSP requires the government to intervene whenever market prices fall below a predefined level, primarily in case of excess production and oversupply or a price collapse due to international factors.
  • It does not require the government to buy all the produce but only to the extent that creates upward price pressures in the market to stabilise prices at the MSP level.
• Extending the Scope of MSP: MSP can also be an incentive price for many of the crops which are desirable for nutritional security such as coarse cereals, and also for pulses and edible oils for which India is dependent on imports.
  • Despite repeated demands from food activists, there has not been any progress in including pulses, edible oils and millets in PDS.
  • These are not just essential for nutritional security but will also increase the pool of farmers likely to benefit from MSP interventions to include small and marginal farmers who grow millets, pulses and edible oil.
• Investing More in Agri-allied Sector: Wisdom lies in investing more in animal husbandry (including fisheries) and fruits and vegetables, which are more nutritious.
  • The best way to invest is to incentivise the private sector to build efficient value chains based on a cluster approach.
  • The government can freeze the MSPs of paddy and wheat, besides capping their procurement at, say, 10-15 quintal per acre per farmer.
• Changing the Pricing Mix: Government must come up with a suitable transition to agricultural pricing policy, whereby partial agricultural pricing should be state-supported and partially market-driven.
  • One way to do this, could be a deficiency payments scheme along the lines of the Bhavantar Bhugtan Yojana (BBY) initiated by Madhya Pradesh.
    • In this scheme, the government, rather than procuring from farmers, compensates farmers with cash transfers when the market price falls below MSP.

Conclusion

It is neither the paucity of funds nor the lack of infrastructural and institutional mechanisms to ensure a guaranteed MSP but basically a lack of understanding of what agriculture needs and above all a lack of political commitment to ensure remunerative prices to farmers.

It is the least that the government can do to protect a sector which remains the largest employer in India.