TOPIC : SHOULD MSP BE LEGALISED?

THE CONTEXT: After the repealing of three farm laws in November 2021, farmers are now demanding for the legalized Minimum Support Price for their crops.  Although, India is already providing MSP for some crops but Farmers are demanding a legal status for MSP for all crops. In this article, we will analyse the issue in detail.

HOW MANY CROPS DOES THE MINIMUM SUPPORT PRICE COVER?

• The Central Government sets a minimum support price (MSP) for 23 crops every year, based on a formula of one-and-a-half times production costs. This considers both paid-out costs (A2) such as seeds, fertilizers, pesticides, fuel, irrigation, hired workers and leased-in land, as well as the imputed value of unpaid family labour (FL).
• Farm unions are demanding that a comprehensive cost calculation (C2) must also include capital assets and the rentals and interest forgone on owned land as recommended by the National Commission for Farmers.
• There is currently no statutory backing for these prices, nor any law mandating their enforcement.
• The government only procures about a third of wheat and rice crops at MSP rates (of which half is bought in Punjab and Haryana alone), and 10%-20% of select pulses and oilseeds.
• According to the Shanta Kumar Committee’s 2015 report, only 6% of the farm households sell wheat and rice to the government at MSP rates. However, such procurement has been growing in the last few years, which can also help boost the floor price for private transactions.

WHY DO FARMERS WANT A LAW ON MSP?

• Farmers are saying that MSP based on a C2+50% formula should be made a legal entitlement for all agricultural produce, so that every farmer of the country can be guaranteed at least the MSP announced by the government for their entire crop.
• According to them, most of the cost should be borne by private traders, noting that both middlemen and corporate giants are buying commodities at low rates from farmers and slapping on a huge mark-up before selling to end consumers.
• Farmers want a law that simply stipulates that neither the government nor private players will be allowed to buy produce from the farmer at a rate lower than MSP.
• All farmers groups seeking legal backing for MSP also want it extended to fruit and vegetable farmers who have been excluded from benefits so far.

WHAT IS THE GOVERNMENT’S POSITION?

• The Prime Minister announced the formation of a committee to make MSP more transparent, as well as to change crop patterns, often determined by MSP and procurement, and to promote zero budget agriculture which would reduce the cost of production but may also hit yields.
• The panel will have representatives from farm groups as well as from the State and Central Governments, along with agricultural scientists and economists.
• The government has assured that the MSP regime is here to stay, even while dismissing any need for statutory backing.

SHOULD MSP BE LEGALIZED?

YES, MSP SHOULD BE LEGALISED?

TO DECIDE THE MINIMUM PRICE OF A CROP

• The demand for a guaranteed remunerative Minimum Support Price is not about the government procuring products from every farmer in the country at the MSP.
• It is indeed preposterous to think so. It is about reinstating the MSP as the bottom price for all agriculture produce through an Act so that farmers are able to realise at least this minimum price, whoever buys the product.

FREEDOM TO SELL

• A legalized MSP means even as the government agencies continue to remunerate the farmers at the MSP; the private sector would also have to do the same.
• Farmers will have a right to the MSP, even as they continue to enjoy the freedom to sell anywhere.

HIGHER-INCOME TO FARMERS

• The corporate world has welcomed the three farm laws and reiterated that it would benefit the farmer by higher incomes. The government also claims the same. But it is not willing to legalise and institutionalise the only instrument that can guarantee this higher income, the MSP.

PRESENT MSP REGIME SHOWS BETTER RESULT

• Farmers in States with MSP procurements and APMC controlled mandis realise better prices than in States like Bihar, which did away with the APMC.
• A free open market is a traders’ delight but can never be a farmers’ choice, if it cannot guarantee remunerative prices.

A STANDARD MECHANISM

• It will also have to set up stand-by mechanisms to intervene in the market when traders show reluctance to buy.
• Kerala, for instance, has announced base prices for 16 vegetables, fruits and tuber crops, though it does not procure them.
• Still it has allocated ₹35 crore as a market intervention fund, in case they have to procure or compensate to intervene in a price crash situation.
• Similarly, post the Indo-Asean agreement, the price of rubber fell drastically, and Kerala has now a budget head with an allocation to compensate the farmers for price loss.

MARKET ITSELF CAN’T GIVE AN APPROPRIATE PRICE TO FARMERS

• According to the Shantha Kumar Committee on restructuring FCI, only 6 per cent of the farmers benefit from procurement. This figure is outdated after decentralised procurement that now covers 23 States for paddy and 10 States for wheat, out of which 10 States for paddy and five for wheat contribute significantly. Still the number of farmers realising MSP rates is between 15-25 per cent.
• This means most of India’s farmers have to sell their produce at much lesser prices, dictated by the markets.

TO MAKE INDIA A $5 TRILLION ECONOMY.

• India can’t be a five-trillion economy without improving its farm sector and for that a good price policy for farmers cropping is a must.
• Seventy years’ experience shows that the government needs to intervene in cropping patterns in India to ensure a better price for farmers crops.

MSP should not be legalized because of the following reasons-

THE ISSUE OF INFLATION

• A law barring purchases of the other 21 crops below MSPs by any private trader will immediately fuel high inflation.
• Every one percentage point increase in MSPs leads to a 15-basis point increase in inflation.
• Higher MSPs could also upend the Reserve Bank of India’s inflation targets, hurting economic growth.

IMPACT ON PRIVATE TRADERS

• If it is not profitable for traders to buy at MSPs, then the private sector will exit the markets.
• A mandatory MSP means that it will be illegal for anyone to buy any notified commodity at below MSP anywhere in India.
• Traders might find it safer to stay away from the market and wait for the government to offload stocks in the market.

GOVERNMENT WILL BE THE SOLE TRADER

• If private buyers will not purchase, the government then becomes the sole trader.
• It would be a disastrous situation as the government will purchase all the commodities.

FISCAL BURDEN ON THE GOVERNMENT

• The value of the 23 crops presently covered under MSP works out to about Rs 7 lakh crore.
• But after a legalized MSP for all crops, it will cost the government only an additional Rs 47,764 crore (2017-18 data).

NOT IN FAVOUR OF COMPETITION

• Mandatory MSPs will render India’s agri- exports non-competitive because the government’s assured prices are way higher than both domestic and international market prices.

WTO RULING

• Surplus cereals can’t be exported without a subsidy, which invites the World Trade Organization (WTO)’s objections. WTO rules cap government procurement for subsidised food programmes by developing countries at 10% of the total value of agricultural production based on 1986-88 prices in dollar terms.

NEED FOR REFORMS IN PRESENT MSP REGIME

Bias in favour of surplus states

The MSPs benefited farmers in only a few states. Nearly all states in India grow rice, and approximately 20 states grow wheat. However, FCI procures approximately 95 percent of wheat from three states: Punjab, Haryana and (Western) Uttar Pradesh. Approximately 85 to 90 percent of rice is procured from 5 states: Punjab, Andhra Pradesh, Haryana, Uttar Pradesh and Tamil Nadu.

Adverse impact on Investment

Hike in procurement prices leads to an additional expenditure by the government. Given the overall resources constraint, the additional expenditure comes at the cost of a decline in fixed investments. While this additional expenditure on stocks favours only rice and wheat (as it is the procurement price of these two crops that has been raised considerably year after year), the decline in fixed investments adversely affects the demand for many non-agricultural sectors.

Distortions in cropping pattern

As pointed out in the Report on Currency and Finance, 2001-02, the agricultural price policy of the government has led to distortions in the cropping pattern. This is because the MSP of rice and wheat (particularly of wheat) has generally been higher than the cost of production. This has made the cultivation of rice and wheat more attractive than pulses and coarse cereals leading to a diversion of area towards them.

Bias in favour of large farmers

Increases in MSP and procurement prices over the years have acted as an incentive to producers to increase their output. However, most of the benefits have been cornered by the large farmers who could implement the new agricultural strategy and easily obtain credit and other inputs.

Economically Unsustainable

The economic cost of procured rice comes to about Rs 37/kg and that of wheat is around Rs 27/kg. However, rice and wheat market prices are much lower than the economic cost incurred by the Food Corporation of India (FCI). Due to this, the FCI’s economic burden is touching Rs 3 lakh crore. This amount eventually will have to be borne by the Union government and may subsequently lead to divergence of funds from being invested in agriculture infrastructure.

HOW CAN INDIA ADDRESS THE ISSUE OF CROPS PROCUREMENT?

DEFICIENCY PAYMENT

• Making MSP a legal entitlement makes it a justifiable right, and there are two ways of ensuring this. The first is through physical procurement by the government. The second is to allow farmers to sell in the private market and if they get a lower price than MSP, then to reimburse the difference between the two. Such a payment is called ‘deficiency payment (DP)’.
• Procurement is the best option for ensuring MSP. However, there are two major constraints to this physical storage capacity and administrative capability (governance), limiting the quantum of procurement. Thus, farmers also need to be supported through DPs.

DIRECT PAYMENTS

• It is important to explore other options that may be fiscally prudent and administratively convenient. One such is direct payments to farmers. However, a different approach is needed for non-staple food commodities. For many of non-staple commodities, MSPs are announced with little or no procurement. This is really ineffective. Thus, a gradual movement to an income-based support system is needed. PM-KISAN is currently attempting this, but the support under the programme is grossly inadequate.

GOVERNMENT SHOULD NOT COME OUT FROM THIS MECHANISM

• However, it needs to be noted that during the Covid-19 crisis as well as earlier food crises in 1975 and 2008, India’s buffer stock system served the country exceedingly well. There is also a large PDS of 80 crore beneficiaries to cater to. Thus, the MSP procurement system needs to be continued for staple food grains and, if possible, be extended to pulses.

Apart from the above measures, the agriculture sector needs some more measures for a permanent solution

• Devise ways to address price- and production-related risks. In addition to insurance and immediate relief for crop loss, the government can make a “deficiency price payment” when prices crash. Under such a system, farmers get the difference between the market price and a pre-agreed price that will act as a form of price insurance. Restructure the marketing framework to allow free movement of farm products.
• Connect the lab to the field: agriculture cannot grow without modern scientific research.
• Pay attention to resource-use efficiency in water and fertilizers. Increase irrigation-related investments in rain-fed areas as the monsoon uncertainties are here to stay.
• Undertake long-term research on how the crop cycle can be aligned with the changing monsoon. Improve availability of early maturing, drought resistant and short duration crops that can handle weather uncertainties.
• Provide alternative jobs to farmers as it is difficult to earn a living from small pieces of land (average land holding is a little over one hectare in India). Liberalize land lease markets as small farms are not viable. Inject funds into rural India to kick-start demand. Announce a package that can revive wage employment by creating rural infrastructure.
• Bring extension services back on the agenda. Farmers need to know about better seeds, proper use of fertilizers, and access to better technologies. Information and communications technology-based services like kisan call centres aren’t enough.
• Make crop insurance more effective. Increase penetration and subsidize premiums so that farmers can avail insurance; carry out damage assessment at the field level to settle claims.

THE CONCLUSION: public procurement needs to continue for staple cereals, but farmers of non-staple food crops need to be provided with direct income transfers, these are fiscally prudent, obviate the need for physical procurement and storage by the government, do not distort current production, and provide a basic income to farmers. These will also address the main concern over the recent farm laws related to the vulnerability of small and marginal farmers and may help these farmers to avoid distress sales.

JUST ADD TO YOUR KNOWLEDGE

ALL ABOUT MSP

MSP

• It is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices.
• A guarantee price for farmers produces from the government.

Objectives of MSP?

• To protect the producer – farmers – against excessive fall in price during bumper production years.
• To support the farmers from distress sales and to procure food grains for public distribution.
• If market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price.

History of MSP

• First time announced by the Government of India in 1966-67  for the wheat in the wake of the Green Revolution and extended harvest, to save the farmers from depleting profits.

How MSP is decided?

The government decides the support prices for various agricultural commodities after taking into account the following:

• Recommendations of Commission for Agricultural Costs and Prices
• Views of State Governments
• Views of Ministries
• Other relevant factors
• Fixing the MSP Policy

Current status

26 commodities are currently covered.

They are as follows.

• Cereals (7) – Paddy, Wheat, Barley, Jowar, Bajra, Maize And Ragi
• Pulses (5) – Gram, Arhar/Tur, Moong, Urad And Lentil
• Oilseeds (8) – Groundnut, Rapeseed/Mustard, Toria, Soyabean, Sunflower Seed, Sesamum, Safflower Seed And Niger seed
• Copra
• De-Husked Coconut
• Raw Cotton
• Raw Jute
• Sugarcane (Fair And Remunerative Price)
• Virginia Flu Cured (VFC) Tobacco

Point to be noted

• Sugarcane is a kharif crop.
• 60% of India’s food grain and oilseeds grown in Kharif Season.

WHAT IS PROCUREMENT PRICE

• At this price FCI will purchase foodgrain for PDS distribution system.
• Procurement prices always higher than MSP.

OPEN ENDED PROCUREMENT (CONDUCTED BY FCI)

For Wheat and Rice (Conducted)

Government will buy AT MSP, from any farmer who comes forward to sell. (even if market prices are running higher than MSP)

other crops (not conducted)

Government will buy ONLY when their prices fall below MSP in open market.

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