MSP and Farmers' Protest

Farmers' disagreement with the Govt. may have many facets to it, but the demand for a Minimum Support Price always has a critical relationship with the ecocnomic viability.

Excess crop production or a good harvest may sound like joy to farmers. But what happens when there is an oversupply of those farm produce and the demand in the market remains the same ?

Going by price determination, demand and supply consideration; price will fall. So, when farmers try to sell their produce, they hit a roadblock. Often the excess supply pushes price so low that they may not be able to even cover their input costs (Also known as cost of production). In such cases many a times, they are better off destroying the crops rather than paying additional charges to transport them for sale.

To address such market conditions, the government introduced MSP where they would buy crops at specified prices from the farmers and store them for later use. The government may use this buffer stock for distribution under various ration schemes or may keep it for rainy days. But how would this MSP be calculated ?

There is a production cost for a crop, which includes costs of seeds, fertilizers, labour, machinery and fuel. It also takes into account the family labour, rental value of the land. By factoring in these costs and offering farmers the minimum price, farmers shall be protected from any market losses (atleast in theory).

The MSP procurement comes under remunerative pricing mechanism where the Govt. goes behind the welfare motive. At the same time, MSP isn't codified under the law, and hence the farmers have a reason to believe that Govt can turn their back on it at any point in time. That is far from reality given the political repercussions, but the possibility of this can not be ignored. This is one of the reasons for protesting farmers. They want a law enacted around MSP.

Well, Is enacting laws around MSP a feasible idea ?

If the Government enacts a laws, favours procurement of paddy and wheat simply becasue they need to ensure adequate supplies. Farmers, if MSP is enacted as laws, may switch to producing only those crops enacted under the law to purposefully benefit from the MSP. Further, it could take a toll on the environment, as most of these is a monsoon dependent and water guzzling crop and also leaves residues which leads to stubble burning.

On the other hand, if MSP is enacted as laws, that means no one can trade the commodity at a lesser price than the MSP and that, potentially, can distort the market forces of demand and supply.

An argument from economics point of view says, if there is an oversupply of crops in the market and prices fall, people still have to buy crops at minimum price set by the government. Anyone buying at prices below the legal MSP could face legal action. Another consideration which can not be ignored is, how much a guaranteed MSP law costs the Govt. The Govt. could end up spending somewhere around 9 Lakh Crore rupees, equivalent to average Govt. spending on Infrastructure development in the past few years. It could take a serious toll on the Government's purse.

A few experts say that the farmers be allowed to sell their crops in the open market, and if that ends up being lower than the MSP, the Govt. calculates, then the Govt. could compensate them for the difference between the two prices. In the year 2017, the govt. of MP experimented with a similar plan but only to realise later that the traders had found ways to rig prices and show crops trading at prices below an average set price to fleece the Govt.

A few others advocate for a direct income support to farmers based on their land holding. But PM Kissan scheme already does that to some extent.

Let's see who wins here ? Economics or Politics ? (No Pun Intended)