Minimum Support Prices for Agricultural Produce

[op-ed snap] From Plate to Plough: Maharashtra vs Marketop-ed snap


Mains Paper 3: Agriculture | Issues related to direct & indirect farm subsidies & minimum support prices

From UPSC perspective, the following things are important:

Prelims level: MSP calculation formulae

Mains level: Maharashtra’s decision of making MSP compulsory and what it might lead to


MSP increase and states response

  1. The Centre’s announcement fixing MSPs at 50 per cent above costs (A2+FL) is viewed as a game-changer in wooing back the farming community
  2. Several states have buffered the MSP increases with bonuses
  3. Madhya Pradesh went a step ahead in the last Kharif when it tried price deficiency payments (Bhavantar Bhugtan Yojana), where it compensated farmers of selected crops for the difference between the realised price and MSP
  4. The scheme fizzled out because traders colluded, farmers suffered plummeting prices and despite concerted efforts, the state government could not compensate beyond one-fourth of the total production

Maharashtra’s decision to make MSP compulsory

  1. In a controversial move, the Government of Maharashtra (GoM) has made buying at MSP mandatory in the state for traders
  2. In case the order is not observed, the licence of the trader will be cancelled, a fine of Rs 50,000 imposed and he must serve a jail term of one year

What can be implications of this decision?

  • In the first scenario, let us assume that traders fall in line and buy everything at MSP or above
  1. What if supply exceeds demand for some Kharif products, which is likely to be the case for most pulses, oilseeds and coarse cereals?
  2. Market prices will tend to fall, possibly below MSPs
  3. If the high MSPs are translated into higher retail prices by not allowing any inward flow from neighbouring states, this would amount to creating a republic of its own with elevated price structures
  4. In that case, the GoM may face the wrath of consumers who would be paying much higher prices than consumers in neighbouring states
  • In scenario two, a private trader buys at MSP, unloads the produce at prevailing market prices that are below MSPs and incurs heavy losses
  1. No rational businessman would do that unless the government promises to compensate losses, akin to the BBY of Madhya Pradesh
  • In the third scenario, Maharashtra’s neighbouring states like Karnataka, Madhya Pradesh and Gujarat are selling the same crops at prices below MSP
  1. Maharashtra’s traders may move to the adjoining states and buy at market prices
  2. In that case, the GoM becomes the buyer-of-last-resort, resulting in a de facto takeover of the wholesale trade

What is actually required?

  1. The best way to deliver a better deal to farmers is to “get the markets right”
  2. Treat farmers as businessmen and facilitate a conducive environment for them to flourish
  3. Reform archaic laws like the Essential Commodities Act (ECA) 1955 and APMC Act
  4. Invite the private sector to build storage, assaying, grading, packing facilities at the back-end with farmer-producer-organisations (FPOs)
  5. Create competition for APMCs by facilitating private mandis
  6. Freeze the commission of the commission agents. As for the market fee, possibly cap it at 2 per cent of the value of agri-produce being transacted for all commodities across the country
  7. Big agri-processors and organised retailers, including e-commerce players, should be invited to buy directly from FPOs without paying any market fee
  8. The Negotiable warehouse receipt system (NWRS) needs to be stepped up, as does futures’ trading
  9. Export bans need to be banned and Minimum Export Price used judiciously

Way Forward

  1. A better approach to help farmers will be to move through an income policy, a la the Telangana model, which will have the least distortions
  2. It can subsume the input subsidies, setting input prices to be freely determined by the markets
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