Date : 15/09/2023

Relevance: GS Paper 3 - Agriculture - MSP

Keywords: Swaminathan Committee, Commission for Agricultural Costs and Prices (CACP), Public Distribution System (PDS)

Context-

• The Cabinet Committee on Economic Affairs granted approval for a rise in the minimum support prices (MSP) for Kharif crops. The present inquiry pertains to the viability of augmenting the Minimum Support Price (MSP) as a prospective solution for farmers, or alternatively, if it would be advisable to confer legal entitlements to farmers on MSP.
• In recent years, farmers have been advocating the establishment of a legally binding assurance on the Minimum Support Price (MSP) for their agricultural produce, which would be determined in accordance with the formula recommended by the Swaminathan Commission.

Understanding Minimum Support Price (MSP)

• The Minimum Support Price (MSP) for a commodity refers to the price at which the government is obligated to purchase the produce from farmers in the event that the market price falls below this threshold.
• The concept of Minimum Support Price (MSPs) was first proposed throughout the 1960s. The government declares minimum support prices for a total of 23 crops throughout each farming season.
• It guarantees that farmers obtain a specific minimum compensation to cover their cultivation expenses and potentially generate some profit. The Minimum Support Price (MSP) fulfills an additional policy objective. By utilizing these measures, the government provides incentives for cultivating specific crops, thus assuring the maintenance of an adequate supply of essential food grains in India.

Factors Considered in MSP Determination

The government mostly relies on the recommendations put out by the Commission for Agricultural Costs and Prices (CACP) when making its decisions.

While recommending MSPs, the CACP looks at the following factors:

• Demand and Supply of the Commodity: Assessing the market dynamics of the specific crop
• Cost of Production: Considering all expenses related to cultivation.
• Market Price Trends: Analyzing both domestic and international price trends.
• Inter-Crop Price Parity: Evaluating price ratios between different crops.
• Terms of Trade: Examining the ratio of prices between farm inputs and outputs.
• Margin over Cost of Production: Ensuring a minimum margin of 50%.
• Consumer Implications: Assessing how MSP affects consumers of that product.

The Central Government determines the minimum support price (MSP) through a formula that takes into account production costs and sets the price at one-and-a-half times these expenses. This analysis considers both explicit costs (A2), which include expenses for items such as seeds, fertilizers, pesticides, fuel, irrigation, hired labor, and leased-in land, as well as the estimated value of unpaid labor provided by family members (FL).

Challenges and Disparities in MSP Implementation

• Based on the findings of the Shanta Kumar Committee’s report in 2015, it was revealed that a mere 6% of agricultural households engage in the practice of selling wheat and rice to the government at Minimum Support Price (MSP) rates. Nevertheless, the procurement in question has experienced a notable increase in recent years, perhaps contributing to the enhancement of the minimum price for private transactions.
• The procurement process at the Minimum Support Price (MSP) is subject to variations based on the specific crop and geographical location. Moreover, Minimum Support Prices (MSPs) lack legal underpinning, meaning that farmers do not possess the legal entitlement to claim MSPs as a matter of right.
• The farmer unions, who spearheaded the prolonged protest resulting in the subsequent repeal of the three farm laws, are urging the government to pass legislation that would grant required status to the Minimum Support Price (MSP), as opposed to its current position as an indicative or desirable price.

Why does Minimum Support Prices (MSP) need to be a legal right?

• Farmers' Plight and Economic Significance: Based on a report published by NABARD in 2019, it was found that the typical financial debt burden faced by a farmer’s household exceeds Rs 1 lakh. Notwithstanding the fact that the central and state governments have allocated a subsidy amounting to Rs 3.36 lakh crore to farmers. Farmers are experiencing adverse impacts from both natural disasters and market forces. The phenomenon of climate change is contributing to the heightened intricacy of agricultural practices.
• Empowering Farmers as Citizens: it is imperative to acknowledge that this right is inherently basic to him. Hence, it is imperative that the agricultural policy of our nation not only prioritizes output but also places significant emphasis on the welfare and needs of farmers. The responsibility of ensuring affordable grain prices to safeguard consumer welfare cannot be exclusively placed upon the farmer.
• Challenges with Current MSP Implementation: The union argues that the government’s objective of guaranteeing 1.5 times the production cost of crops fails to effectively alleviate the challenges faced by farmers, as it does not offer a profitable price for their produce.

He further asserts that the Minimum Support Price (MSP) should adhere to the Swaminathan Commission’s recommended formula, which suggests a calculation based on C2+50%. Furthermore, it is imperative for the government to establish the Minimum Support Price (MSP) as a legally mandated entitlement for farmers..

• Economic Implications of Higher MSP: According to experts, the increase in food prices can potentially benefit both farmers with surplus production and farmers experiencing a net food deficit, provided that the latter group is safeguarded through the implementation of an efficient food subsidy program. The farmers would engage in the practice of selling their produce at comparatively elevated prices while procuring it at lower rates from the Public Distribution System (PDS) establishments. An elevated minimum support price (MSP) has the potential to enhance the remuneration of agricultural workers, rendering them beneficiaries as well, provided they are shielded from the effects of food inflation.

Why Minimum Support Price (MSP) cannot be a legal right?

• Impact on Agriculture: The implementation of a guaranteed Minimum Support Price (MSP) policy in India would have detrimental effects on the country’s agricultural sector. Moreover, it is anticipated that this phenomenon will lead to an exacerbation of aberrations in agricultural cropping patterns.
• Limited Beneficiaries: The farmers in Punjab and Haryana have historically been the primary beneficiaries of the Minimum Support Price (MSP) system, owing to the lasting impact of the Green Revolution. However, in recent times, the procurement of agricultural produce at MSP has expanded to several other states, with notable examples being Chhattisgarh and Telangana for paddy, and Madhya Pradesh for wheat.
• Efficiency and Alternatives: There is no process more irrational and economically inefficient than the practice of purchasing paddy from small and marginal subsistence farmers at Minimum Support Price (MSP), only to subsequently return the same rice to them after incurring additional costs amounting to 40% higher than the MSP during the procurement, stocking, and distribution stages.
• Exploring Alternatives: Providing direct assistance to small and marginalized farmers through the implementation of an income policy or the provision of a diversification package aimed at promoting high-value agriculture. The PM-KISAN policy, which involves the provision of Rs 6,000 directly into the bank accounts of agricultural households, is deemed to be significantly more efficient and beneficial for small-scale and economically disadvantaged farmers.

There are other options than the minimum support price (MSP)

• Diverse Agricultural Landscape: As per the analysis of numerous experts, one approach is the imposition of mandatory Minimum Support Price (MSP) payments upon private traders or processors. This application is already feasible in the cultivation of sugarcane. As per legal regulations, sugar mills are obligated to compensate farmers with the Centre’s designated “fair and remunerative price” for cane. Additionally, certain state governments have established higher recommended prices, commonly referred to as “advised prices.”
• Government Procurement: The second approach involves the government engaging in procurement at Minimum Support Price (MSP) through its various organizations, including the Food Corporation of India (FCI), National Agricultural Cooperative Marketing Federation of India (Nafed), and Cotton Corporation of India (CCI). In a broad sense, the implementation of Minimum Support Price (MSP) has demonstrated effectiveness primarily in four key crops, namely sugarcane, paddy, wheat, and cotton. In five other crops, namely chana, mustard, groundnut, tur, and moong, the effectiveness of MSP implementation has been somewhat limited. However, in the case of the remaining 14 notified crops, the implementation of MSP has been weak or non-existent. In the domains of livestock and horticultural produce, such as milk, eggs, onions, potatoes, and apples, the concept of Minimum Support Price (MSP) is absent, even in theoretical terms.
• Price Deficit Payments: In this context, the government does not engage in the direct procurement or imposition of Minimum Support Price (MSP) on the private sector. In contrast, it facilitates the conduct of sales made by farmers at the currently prevailing market rates. Farmers receive compensation equivalent to the disparity between the government’s Minimum Support Price (MSP) and the average prevailing market price for the specific crop during the period of harvest.
• Market-Driven Approach: This implies that price determination is predominantly driven by market forces, with government intervention occurring when prices deviate far beyond the standard deviation. Additional agricultural experts concur that the current need lies in establishing effective markets and implementing measures such as price or income support to promote efficient production, as opposed to ensuring a fixed price for every crop.

Conclusion

• Whether Minimum Support Prices (MSPs) should be made a legal right is complex and multifaceted. The agricultural sector in India is diverse, with varying conditions and challenges faced by different types of farmers. While MSPs have played a significant role in providing a safety net for farmers, there are arguments both for and against legalizing MSPs.
• Proponents of legalizing MSPs argue that it is essential to protect the livelihoods of millions of farmers who rely on agriculture for their sustenance. They emphasize the need to guarantee fair prices and income security to farmers, especially small and marginal ones. Legalizing MSPs could also address issues of market volatility and exploitation by intermediaries.
• On the other hand, opponents argue that legalizing MSPs may not be a practical solution due to the diverse nature of agriculture in India. They suggest that it could lead to distortions in cropping patterns, inefficiencies, and challenges in implementation. Instead, they propose alternative mechanisms, such as price deficit payments and market-driven approaches, to support farmers.
• Ultimately, the decision to legalize MSPs or explore alternative solutions should consider the interests of farmers, the economic implications, and the sustainability of India's agricultural sector. It is a complex policy issue that requires careful deliberation and consideration of all relevant factors.

Source- The Indian Express