Minimum Support Prices for Agricultural Produce

[op-ed snap] MSP Hike is a big blunder. Farmers are producers not objects of charity


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

From UPSC perspective, the following things are important:

Prelims level: Minimum support prices (MSPs), European Economic Community

Mains level: Relation between farm sector and poverty alleviation and how DBT can help


The recent hike in MSP

  1. The big jump in minimum support prices (MSPs) for kharif crops announced by the government could be its biggest economic blunder
  2. It gives farmers a fixed margin of 50% over their input costs and imputed labour cost, ignoring demand, supply and international competitiveness
  3. This makes no economic sense for any activity, let alone farming

What will be the impact of such incentives?

  1. Incentives that are being provided will worsen over-production
  2. The 50% margin over costs will raise prices above even their current uncompetitive levels, making exports even more difficult
  3. A fixed mark-up over costs will encourage even greater use of purchased inputs and labour, which in turn will send MSPs even higher in a vicious circle
  4. Higher food prices will worsen inflation
  5. The RBI will seek to curb this by raising interest rates, hurting industry and exports
  6. This will dent India’s long-term GDP growth and prosperity

Correlation between farm distress & poverty

  1. Farm distress is a reality but does not mean growing poverty
  2. A recent Brookings paper shows that 44 Indians per minute are rising above the poverty line, and extreme poverty will soon fall to almost nothing
  3. The farm problem is not poverty or scarcity but excess production of several crops
  4. The resulting glut has depressed farm prices, often below old MSP rate

Europe’s example

  1. The European Economic Community once tried something similar, offering prices to farmers well above global rates to make Europe self-sufficient in food, to provide food security in the event of war with the USSR
  2. High prices created unsold mountains of butter and meat and lakes of milk and wine
  3. These ultimately had to be disposed of by selling them at a throwaway price to the USSR, the supposed enemy
  4. Learning from this folly, Europe shifted its subsidies from crops to farmers
  5. Direct cash transfers to farmers replaced high prices for crops
  6. This finally brought supply and demand back in balance, eliminated huge surpluses, and still alleviated farm distress

What can India do?

  1. India needs to learn from the EEC’s mistakes, not replicate them
  2. Indian experience shows that subsidising goods (food, fertiliser, electricity, LPG) leads to large leakages to the undeserving and to middlemen
  3. Experts estimate that three rupees of spending are needed to get one rupee through to beneficiaries
  4. Direct benefit transfers to bank accounts work only if good financial and telecom infrastructure exist
  5. A possible national strategy would start with preparatory efforts for good land records and financial infrastructure
  6. Next should be phased moves to a cash grant of Rs 4,000 per acre per year, up to a limit of five acres per holding

Way Forward

  1. DBT will avoid the evils of cost-plus pricing and encouraging overproduction
  2. It will limit the cost of farm rescues while benefiting small farmers most
  3. It will curb gluts that depress prices


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