Minimum Support Prices for Agricultural Produce

Back in news: Minimum Support Price (MSP)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : MSP system

Mains level : Issues with MSP

Ahead of the nationwide protests demanding a law to ensure MSP, NITI Aayog has asserted that the MSP should continue till markets become competitive and efficient.

What is MSP?

  • The MSP assures the farmers of a fixed price for their crops, well above their production costs.
  • MSP, by contrast, is devoid of any legal backing. Access to it, unlike subsidized grains through the PDS, isn’t an entitlement for farmers.
  • They cannot demand it as a matter of right. It is only a government policy that is part of administrative decision-making.
  • The Centre currently fixes MSPs for 23 farm commodities based on the Commission for Agricultural Costs and Prices (CACP) recommendations.

Fixing of MSPs

  • The CACP considered various factors while recommending the MSP for a commodity, including the cost of cultivation.
  • It also takes into account the supply and demand situation for the commodity; market price trends (domestic and global) and parity vis-à-vis other crops; and implications for consumers (inflation), environment (soil and water use) and terms of trade between agriculture and non-agriculture sectors.

What changed with the 2018 budget?

  • The Budget for 2018-19 announced that MSPs would henceforth be fixed at 1.5 times of the production costs for crops as a “pre-determined principle”.
  • Simply put, the CACP’s job now was only to estimate production costs for a season and recommend the MSPs by applying the 1.5-times formula.

How was this production cost arrived at?

  • The CACP projects three kinds of production cost for every crop, both at the state and all-India average levels.
  • ‘A2’ covers all paid-out costs directly incurred by the farmer — in cash and kind — on seeds, fertilizers, pesticides, hired labor, leased-in land, fuel, irrigation, etc.
  • ‘A2+FL’ includes A2 plus an imputed value of unpaid family labor.
  • ‘C2’ is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets, on top of A2+FL.

How much produce can the government procure at MSP?

  • The MSP value of the total production of the 23 crops worked out to around Rs 10.78 lakh crore in 2019-20.
  • Not all this produce, however, is marketed. Farmers retain part of it for self-consumption, the seed for the next season’s sowing, and also for feeding their animals.
  • The marketed surplus ratio for different crops is estimated to range differently for various crops.
  • It ranges from below 50% for ragi and 65-70% for bajra (pearl millet) and jawar (sorghum) to 75% for wheat, 80% for paddy, 85% for sugarcane, 90% for most pulses, and 95%-plus for cotton, soybean, etc.
  • Taking an average of 75% would yield a number of just over Rs 8 lakh crore.
  • This is the MSP value of production that is the marketable surplus — which farmers actually sell.

Nature of MSP

  • There is currently no statutory backing for these prices, nor any law mandating their enforcement.

Farmers demand over legalization

  • Legal entitlement: There is a demand that MSP based on a C2+50% formula should be made a legal entitlement for all agricultural produce.
  • Private traders’ responsibility: Some says that 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.
  • Mandatory purchase at MSP: A left-affiliated farm union has suggested a law that simply stipulates that no one — neither the Government nor private players — will be allowed to buy at a rate lower than MSP.
  • Surplus payment by the govt.: Other unions have said that if private buyers fail to purchase their crops, the Government must be prepared to buy out the entire surplus at MSP rates.
  • Expansion of C2: Farm unions are demanding that C2 must also include capital assets and the rentals and interest forgone on owned land as recommended by the National Commission for Farmers.

Government’s position

  • The PM has announced the formation of a committee to make MSP more transparent, as well as to change crop patterns — often determined by MSP and procurement.
  • The panel will have representatives from farm groups as well as from the State and Central Governments, along with agricultural scientists and economists.

Issues with legal backing

  • Demand-supply dynamics: Economic theory, as well as experience, indicates that the price level that is not supported by demand and supply cannot be sustained through legal means.
  • States responsibility: The Centre has suggested that the States are free to guarantee MSP rates if they wish, but also offers two failed examples of such a policy:

[I] Sugar FRP

  • In the sugar sector, private mills are mandated to buy cane from farmers at prices set by the Government.
  • Faced with low sugar prices, high surplus stock, and low liquidity, mills failed to make full payments to farmers, resulting in an accumulation of thousands of crores worth of dues pending for years.

[II] Withdrawal of traders

  • The other example is a 2018 amendment to the Maharashtra law penalizing traders with hefty fines and jail terms if they bought crops at rates lower than MSP.
  • As open market prices were lower than the (legalized) MSP levels declared by the State, the buyers withdrew from the market and farmers had to suffer.

Will a legal backing for MSP solve all the ills that plague the Agriculture sector?

  • Only one side of the coin: Actually, no. Remunerative price or MSP is only one part of the problems farmers face.  Farmers face many other issues other than price, which itself is not guaranteed given the influence of politicians and cartels in mandis.
  • Information deficit: They lack information on which crop to grow, when to sow, apply plant nutrients and which pest is attacking their crop.
  • Lack of technology: Farmers are also short of post-harvest technologies to ensure a better shelf life for their produce.
  • Irrigation and storage problem: They do not get adequate facilities to irrigate their lands, with nearly 50 percent of the land being rain-fed and lacking ample warehouses to store their produce at the village level, besides proper roads to connect them to the mandis.
  • Threat of new loopholes: Legal backing for the MSP could also lead to the danger of the trade keeping away from places where the law is implemented vigorously.

 Fiscal cost of making the MSP legally binding

  • The MSP value of the total output of all the 23 notified crops worked out to about Rs 11.9 lakh crore in 2020-21.
  • Taking an average of 75% yields a number – the MSP value of production actually sold by farmers – just under Rs 9 lakh crore.
  • The government is further, as it is, procuring many crops. The MSP value of the 89.42 mt of paddy and 43.34 mt of wheat alone bought during 2020-21 was around Rs 253,275 crore.
  • All in all, then, the MSP is already being enforced, directly or through fiat, on roughly Rs 3.8 lakh crore worth of produce.
  • Providing a legal guarantee for the entire marketable surplus of the 23 MSP crops would mean covering another Rs 5 lakh crore or so.

Conclusion

  • A growing consensus among economists for guaranteeing minimum “incomes”, as against “prices”, to farmers.
  • That would essentially entail making more direct cash transfers either on a flat per-acre (as in the Telangana government’s Rythu Bandhu scheme) or per-farm household (the Centre’s PM-Kisan) basis.
  • The resource requirement of such interventions will be so huge that no government will be left with resources to help farmers through other means like investment in public infrastructure, irrigation, and other incentives.
  • The danger of over-reliance on MSP is already visible in the state of Punjab. Agriculture has reached an almost static stage there.
  • The state is unable to diversify away from crops like paddy, which is destroying its natural resources and environment, marring long-term prospects of farming.

 

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