Agriculture > Crops > Minimum support price
- A major demand of the farmers protesting against the three new farm laws has been that the central government should bring in a law to give the Minimum Support Price system a legislative framework.
WHAT IS MSP?
- Minimum Support Price is the price set by the government to purchase crops from the farmers. MSP was introduced to give financial stability into the agricultural system and encourage production.
- The MSP is in the nature of an assured market at a minimum guaranteed price offered by the Government.
- Every year, at the beginning of each sowing season, the Cabinet Committee of Economic Affairs announces MSP for various crops based on the recommendations of the Commission for Agricultural Costs and Prices (CACP).
- At present, Government announces MSPs for a total of 25 crops. They are:
- 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 nigerseed
- Raw cotton
- Raw jute
- De-husked coconut
- Virginia flu cured (VFC) tobacco
- Sugarcane (Fair and Remunerative Price (FRP))
SHOULD MSP BE LEGALISED?
- Assures payment: MSP is just an indicative price for procurement. However, in reality, the procurement is done at a price much less than MSP owing to factors such as excess supply, lack of storage infrastructure etc. Here, statutory backing can eliminate this issue.
- Already exists for sugarcane: In case of sugarcane, MSP has been assigned a statutory status called Fair Remunerative Price (FRP). There is statutory binding on sugar factories to pay the minimum announced price and all those transactions or purchase at prices lower than this are considered illegal.
- Protects farmers’ interests: A free open market is a traders’ delight but can never be a farmers’ choice without guaranteed remunerative prices. Considering that majority of farming in India is small and marginal in nature, legalising MSP can greatly enhance farm returns and promote the idea of doubling farmers income.
- Better bargaining power: Small and marginal farmers with less than two hectares of land account for 86.2% of all farmers in India. With statutory MSPs, these farmers will have a better bargaining power.
- Prevent private malpractices: Without a legal backing, the big corporations and private traders could use the system to advance their interests and force the market to crash only to pick the commodity later at a much lower price.
- Encourages sale in APMCs: Without a legal backing, farmers outside APMCs have to sell their produce at much lesser prices, dictated by the markets. But with assured MSP, farmers will be more encouraged to sell in the APMC mandis.
- Supported by CACP: In 2018, the CACP had suggested the Centre should make MSP a legal right for the farmers, adding that making MSP a legal entitlement will ‘instill confidence among farmers.’ However, the report was not discussed back then.
- Helps unaware farmers: In a report to measure the efficacy of MSPs, the NITI Aayog found that a low proportion of farmers (10%) were aware of MSPs before the sowing season. 62% of the farmers were informed of MSPs only after sowing their crops. Legalization can effectively prevent procurers from looting unaware farmers due to fear of legal measures.
- Against free market principles: The principles of free-market economy stipulate that the market dynamics will lead to a better price realization for a good, thus creating a balance between producers and consumers. However, if the state starts to regulate the price of goods, the market equilibrium will eventually disrupt leading to either higher prices of the product or completely crashing down the value.
- Promotes inflation: The higher costs of procurement and open market operations of food grains caused due to a statutory MSP will increase the food prices, leading to inflation in the economy.
- Arises from misplaced fears: The farmers’ premise for demanding the legal backing for MSPs comes from the fear that MSP will not be enforced once private mandis come up. However, the government has categorically stated that the MSP system will remain.
- Disincentivizes private players: Legalizing MSP will effectively derail the market for other players. It can discourage entities from investing in India’s farm sector as they find it less profitable and more cumbersome. In the long run, this will affect the ease of doing business in the country.
- Absence of necessary support systems: Legalising MSP needs to be backed by strong supply chain facilities like storage, transportation and distribution. But the Food Corporation of India (FCI) is riddled with a serious shortage of storage facilities and an inefficient grain handling system, which has resulted in severe rotting and pilferage.
- Create fiscal burden: As excess stocks pile up, the financing, storage and other logistics cost goes up. This forces the FCI to dump excess grains in open market. Such transactions often take place at a price much lower than the procurement cost, thereby causing massive increase in the government’s food subsidy.
- Affects exports: If MSPs determined by the government and enforced by a law is higher than the prevailing rates at the international market, the agricultural exports from India will become costlier. Hence, India’s agriculture exports, which accounts for about 11 per cent of the total export commodities, will be less attractive leading to losing out in international markets.
- Widens inequalities: Legalising MSP could worsen the inter-crop and inter-regional disparities that exist today.
- Environmental costs: MSP has changed the cropping pattern and made agriculture unsustainable. For eg: Paddy production in the semi-arid Punjab plains has adversely affected the groundwater management in the region. Legalising MSP could worsen the situation.
- Complicates International disputes: India’s MSP regime has been a major bone of contention under the World Trade Organisation (WTO) because it comes under trade distorting support as per the Agreement on Agriculture (AoA). If legalised, it will result in a scenario whereby Indian subsidy could go well beyond 10%, resulting in violation of India’s commitments under AoA.
- Bridge the price gap: The inclination for a farmer to demand legal backing to MSP comes from the growing gap between MSPs and the realized market price. Hence, a short-term solution should be on ensuring that farmers get the full benefits of MSP.
- Market reforms: A serious cause of agrarian crisis lies in the weak market. There is a need to transform marketing arrangements for improving market efficiency by strengthening existing institutions, like FPOs, contract farming, cooperatives, and SHGs.
- Price assurance mechanisms: State governments should set up stand-by mechanisms to intervene in the market when traders show reluctance to buy. For eg: Kerala government has announced base prices for 16 crops, though it does not procure them. It has allocated Rs. 35 crore as a market intervention fund, in case they have to procure or compensate, to intervene in a price crash situation.
- NITI Aayog’s alternatives: NITI Aayog in consultation with state governments has proposed three alternative mechanisms:
- Market assurance scheme: This proposes procurement by government machinery from the farmers at MSP in case farm harvest prices fall below that.
- Price Deficiency payment: Price deficiency payment scheme - Under this scheme if the farmers’ sale price is below a modal price, then the they will be compensated the difference between MSP and actual price.
- Private participation in stockers scheme: This scheme relates to the procurement at MSP by the private entrepreneurs.
- Promote cooperatives: Cooperative agriculture is a key area which can help small and marginal farmers. Governments need to leverage on the success stories of Amul Dairy Cooperative in Gujarat and Kudumbashree programme in Kerala and encourage cooperative farming.
Q. ‘Doubling farmers income is not possible unless farmers realize a better price for their produce’. In this regard, critically examine the demand for providing legislative backing for Minimum Support Price (MSP) system. Discuss?