Decoding India's MSP Policy: Impact on Farmers, Markets, and Food Security
Sweat dripped onto Suresh's weathered face as he surveyed his bountiful rice harvest. Unlike other years, a cloud of worry hung heavy. The market price dipped below last year's MSP but selling at a loss felt impossible. "Our family lives on this harvest," he muttered, watching trucks bypass his village for cheaper options. His wife, Lakshmi, echoed his fear, "What if next year's MSP doesn't cover even the fertilizer cost?" This anecdote reflects the MSP dilemma: while it protects farmers from price crashes, it can distort markets, leading to inefficiencies and potentially higher food prices for consumers, raising food security concerns. The debate continues: is MSP a safety net or a crutch, and how can India balance farmer income, market dynamics, and food security for all?
Let us delve into the issue by analyzing it from multiple dimensions-
What is MSP?
MSP is a form of government intervention in India to insure agricultural producers against sharp falls in farm prices. The government announces MSPs for certain crops at the beginning of the sowing season, and if market prices fall below the MSP, the government will buy the crops from farmers at the MSP. This is intended to provide farmers with a guaranteed minimum income for their crops.
EVOLUTION OF MSP
In India has its roots in the aftermath of the Green Revolution in the 1960s. The Green Revolution led to a significant increase in agricultural production, especially of wheat and rice. However, it also brought about certain challenges for farmers, including fluctuating market prices and uncertainty about their income.
To address these challenges and ensure stability in agricultural income, the Indian government introduced the concept of Minimum Support Price (MSP) in the Agricultural Prices Commission Report of 1965. The MSP is essentially a price set by the government to ensure that farmers receive a minimum price for their produce. It serves as a safety net for farmers by guaranteeing them a minimum level of income for their crops, thereby incentivizing agricultural production.
CURRENT MSP REGIME
The government announces MSPs for 22 mandated crops and Fair and Remunerative Prices (FRP) for sugarcane. The mandated crops are 14 crops of the kharif season, 6 rabi crops and two other commercial crops.
The list of crops is as follows :
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
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Copra
De-husked Coconut
Sugarcane (FRP)
Virginia flu-cured (VFC) Tobacco
Presently, MSPs are notified for 23 crops, but procurement is done for wheat and paddy, which meets the requirements of the public distribution system.
The government bases its announcement on the recommendations given by the Commission for Agricultural Costs & Prices (CACP), which details three major formulas to arrive at MSP:
A2: Costs incurred by the farmer in the production of a particular crop. It includes several inputs such as expenditure on seeds, fertilizers, pesticides, leased-in land, hired labour, machinery and fuel.
A2+FL: Costs incurred by the farmer and the value of family labor.
C2: A comprehensive cost, which is A2+FL cost plus imputed rental value of owned land plus interest on fixed capital, rent paid for leased-in land.
POINT OF DISAGREEMENT BETWEEN GOVERNMENT AND FARMERS
National Commission of Farmers also known as the Swaminathan Commission (2004) recommended that the MSP should at least be 50 per cent more than the weighted average CoP, which it refers to as the C2 cost.
However, The government maintains that the MSP was fixed at a level of at least 1.5 times of the all-India weighted average CoP, but it calculates this cost as 1.5 times of A2+FL.
ARGUMENTS AGAINST LEGAL GUARENTEE OF MSP
1. Financial Strain:
Buying crops at MSP can drain government funds, impacting investments in other crucial areas like infrastructure and education.
Example: In 2022-23, India's food subsidy bill reached a record ?2.4 lakh crore, largely due to MSP-driven procurement. Further, official sources have indicated that if an MSP guarantee law were to be introduced, the government would be looking at an additional expenditure of at least Rs 10 lakh crore annually.
Further, Prominent Agricultural economist ASHOK GULATI Suggest, marginal returns on agri-investments are 5 to 10 times higher than from agri-input subsidies.
2. Discouraging Innovation:
Legalizing MSP might discourage private investments in agriculture, potentially slowing down modernization and technology adoption.
Example: Private players might be hesitant to enter sectors with fixed government pricing, limiting new technologies and farming practices.
3. Water Woes:
MSP-supported crops like rice and sugarcane require substantial water, raising concerns about overexploitation in dry regions.
Example: In Punjab, excessive paddy cultivation linked to MSP has strained water resources, leading to environmental degradation. Furher, due to lowering of groundwater table, hazardous cancer causing chemicals have mixed with water, drinking such water is making Punjab a cancer state.
4. Neglect of Other Crops:
Focusing solely on MSP crops might neglect crucial non-MSP crops like pulses and oilseeds, impacting dietary diversity and food security preventing crop diversification. It has made India loose its precious forex reserve to import oilseeds.
Example: Increased focus on rice and wheat due to MSP could lead to decreased production of protein-rich pulses, affecting nutritional outcomes.
5. Export Challenges:
Higher MSPs can make crops less competitive in the global market, potentially leading to trade disputes and reduced export volumes.
Example: India faces opposition at WTO for its rice export subsidies, partly linked to maintaining high MSPs for paddy.
The Minimum Support Price (MSP) policy in India is at odds with some World Trade Organization (WTO) rules, creating several challenges:
6. WTO Subsidy Limits:
WTO rules impose limits on domestic support provided to agriculture. India's current MSP system, particularly for crops like rice and wheat, can be seen as exceeding these limits.
Example: The US and other countries have raised concerns at the WTO about India's public stockholding program, arguing it distorts global food prices and harms other nations' food security.
7.Trade Distortions:
High MSPs can make Indian agricultural products less competitive internationally, potentially violating WTO principles of fair trade.
Example: Higher MSP-driven domestic prices for rice discourage exports, potentially impacting countries reliant on Indian rice import
ARGUMENTS IN FAVOUR OF MSP
1. Ensuring Financial Viability of Agriculture:
Legalizing MSP guarantees farmers a minimum price for their produce, protecting them from market fluctuations. For instance, if the market price for wheat falls below the MSP, farmers can still sell their produce at the guaranteed price.
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Example: In 2021, despite a bumper crop, wheat farmers in some states faced distress selling their produce below the MSP due to market glut.
2. Reducing Debt Burden on Farmers:
Data from the National Bank for Agriculture and Rural Development (NABARD) reveals that the average debt burden on a farmer’s family exceeds Rs 1 lakh. Despite substantial government subsidies, the debt burden continues to rise.
Total outstanding loans on farmers increased from Rs 9.64 lakh crore in March 2014 to Rs 23.44 lakh crore in 2021-22.
Example: Many farmers are forced to take loans from informal sources at high-interest rates when they are unable to realize MSP for their crops.
3. Supporting Farmers' Livelihoods:
Legalizing MSP supports millions of small and marginalized farmers who are vulnerable to market uncertainties. About 50% of India’s population depends on agriculture for their livelihood.
Example: Small-scale farmers often lack bargaining power in the market and are compelled to sell their produce at prices below the MSP.
4. Risk Mitigation:
Farmers face numerous unpredictable factors such as extreme weather events and market fluctuations. MSP serves as a safety net, reducing the risk of income loss during unfavorable conditions.
Example: Erratic rainfall patterns due to climate change can severely impact crop yields, making MSP crucial for farmers' financial stability.
5. Addressing Market Imperfections:
Middlemen often exploit farmers, leading to disparities between the price received by farmers and the price paid by consumers. Legalizing MSP can regulate these practices.
Example: Despite selling their produce at low prices, farmers often observe substantial mark-ups by middlemen before the products reach consumers.
6. Promoting Agricultural Growth:
MSP legalization encourages farmers to invest in agricultural production by providing price stability and income security, contributing to overall food security.
Example: Increased income security can incentivize farmers to adopt modern farming techniques and invest in productivity-enhancing technologies.
7. Addressing Disparities:
Currently, a small percentage of farmers benefit from MSP, with certain regions dominating procurement. Legalizing MSP can ensure a uniform price guarantee for all farmers.
Example: In 2019-20, three states—Punjab, Haryana, and Madhya Pradesh—accounted for 85% of wheat procurement, leaving out farmers from other regions.
WAY FORWARD
1. Remunerative Pricing:
Global Best Practice: Thailand's guaranteed income scheme: Pays farmers the difference between market price and a predetermined price for key crops, protecting income without distorting markets.
Local Model: Madhya Pradesh's Bhavantar Bhugtan Scheme: Similar to Thailand's model, offering price deficiency payments for select crops.
2. MSP Modernization:
Global Best Practice: Kenya's market-based MSP: Links MSP to market prices, adjusting based on supply-demand dynamics.
Local Model: Proposal by Swaminathan Commission: Set MSP at 50% above weighted average cost of production (C2).
3. Income Enhancement:
Global Best Practice: Ethiopia's Productive Safety Net Programme: Provides cash transfers and agricultural inputs to boost income and resilience.
Local Model: MGNREGS expansion: Include agricultural activities and increase wages to create alternative income sources.
4. Infrastructure & Technology:
Global Best Practice: China's rural infrastructure investment: Enhances market access and reduces post-harvest losses.
Local Model: NABARD's RIDF scheme: Provides funds for rural infrastructure development, including irrigation and storage facilities.
Global Best Practice: Israel's drip irrigation technology: Conserves water and improves agricultural productivity.
Local Model: Government of India's National Mission on Sustainable Agriculture (NMSA): Promotes adoption of water-saving technologies.
5. Empowerment & Governance:
Global Best Practice: Philippines' Farmer Information and Technology Service (FITS): Provides market information and technical assistance to farmers.
Local Model: Karnataka's Farmer Producer Organizations (FPOs): Empower farmers through collective bargaining and market access.
Global Best Practice: Indonesia's anti-corruption measures: Reduce bureaucratic hurdles and ensure fair market practices.
Local Model: Government of India's direct benefit transfer (DBT) schemes: Improve transparency and reduce leakages in government programs.
CONCLUSION
1. Legalizing MSP might not be the most effective solution for farmers due to potential market distortions and its inability to address the needs of all agricultural sectors. Focus should be on agri-investment.
2. A price stabilization fund could be a more pragmatic approach to mitigate market risks for farmers without disrupting market dynamics.
3. Focusing solely on MSP for a limited number of crops might neglect other crucial agricultural sectors and their associated challenges.
4. ?Alternative solutions like income support schemes or direct payments to farmers might be worth exploring alongside policy revisions and improved market infrastructure
In Nutshell, for providing relief to millions of farmers like Suresh and Lakshmi and balancing economics of MSP, requires a balanced agricultural pricing policy. This demands a multi-pronged approach, drawing inspiration from global best practices and adapting them to local realities.
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Thanks for reading!!
Written by Shubham Saraf
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