Context: The committee constituted by the Government on minimum support price (MSP) to examine the feasibility of granting greater autonomy to the Commission for Agricultural Costs and Prices (CACP), and to explore ways to make it more scientific, as well as to provide suggestions for offering a legal guarantee to MSP, held six meetings in the two years since July 2022.
Minimum Support Price (MSP)
- It is a form of market intervention by the Government of India to ensure agricultural producers against any sharp fall in farm prices.
- Announced by Cabinet Committee on Economic Affairs at the beginning of the sowing season for 22 mandated crops and fair and remunerative price (FRP) for sugarcane based on the recommendations of the Commission for Agricultural Costs and Prices (CACP).
- Price fixed by Government of India to protect the producer farmers against excessive fall in price during bumper production years. They are a guaranteed price for farmer’s produce from the Government.
Coverage of Commodities:
- 7 Cereals: Paddy, Wheat, Maize, Jowar (Sorghum),
- Bajra (Pearl Millet), Barley and Ragi.
- 5 Pulses: Gram, Tur, Moong, Urad and Lentil
- 7 Oilseeds: Groundnut, Rapeseed/ Mustard, Soybean, Sesamum, Safflower, Niger seed.
- 3 Commercial Crops: Copra, Cotton, Raw Jute (Sugarcane covered under FRP)
Present Status of MSP:
Presently, MSP does not enjoy statutory recognition. This means that,
- No obligation on the Government to purchase all the commodities for which MSP is declared.
- No obligation on the Government to pay MSP to the farmers.
- No obligation on the private sector to purchase commodities at MSP. Private sector can purchase below MSP.
Need For Legalisation of MSP
- Promote crop diversification: Only three to four crops (mainly wheat, paddy and cotton and at times some pulses), were being procured at MSP while the remaining crops were being procured at much below the MSP. Hence, absence of any dependable or assured market mechanism of procurement-purchase for crops on the MSP in most parts of the country discourages efforts towards crop diversification.
- Income security for farmers: Legalising MSP would guarantee farmers a minimum income, helping them cover costs and reduce financial distress that reduces the farmer suicides.
- Stability in agriculture: A legal MSP can provide stability and predictability in agricultural income, encouraging farmers to invest more in agriculture.
- Modernise agriculture: It aligns with the national interest by formalizing and digitizing commodity transactions, supporting the government's goal to modernize agriculture.
Challenges and concerns:
- Adverse impact on economy: Higher costs of procurement due to a statutory MSP will increase the food prices, leading to inflation in the economy. Higher prices of commodities would adversely affect exports of agricultural commodities.
- Financing needs: According to some estimates, if the Government were to procure all the 23 crops at MSP, it would amount to half of the Government's Budget.
- Unsustainable food grain management policy: The Food subsidy bill has already become quite unsustainable at around Rs 2 lakh crores. The excess procurement of food grains by the FCI has led to surplus buffer stocks leading to higher storage costs and wastages. Legalisation of MSP would further worsen the scenario.
- Administrative challenge: Lack of government machinery to procure all crops that are under the MSP system.
- Violation of WTO Agreement on Agriculture (AoA): Legalisation of MSP would further violate the limit on the subsidies under AoA and it can be challenged by other countries. India's quest for Permanent solution on public stockholding could be in jeopardy.
- Promote inequality: Only 6 percent of farmers are able to benefit from the MSP. Similarly, most of the Rice and Wheat are sourced from states such as Punjab, Haryana, MP etc. Hence, legalisation of MSP could worsen socio-economic inequality and promote regional disparity.
- Environmental cost: Encourage farmers to grow more rice and wheat leading to further environmental problems.
- Adverse impact of Government's intervention: In any free-market economy, the price of any goods and services produced in the country must be decided by market forces and not by the state. As highlighted by Eco Survey 2019-20, Government's intervention, sometimes though well intended, often ends up adversely affecting the market. For example, the regulation of prices of drugs through the DPCO 2013, has led to an increase in the price of a regulated pharmaceutical drug vis-à-vis that of a similar drug whose price is not regulated.
Conclusion:
- Better marketing infrastructure: Improving agricultural marketing infrastructure, including e-NAM, to ensure better prices for farmers.
- Insurance schemes: Strengthening crop insurance schemes to protect farmers against price volatility and natural calamities.
- Progressively increase the number of crops eligible for MSP: To encourage crop diversification and lessen the dominance of rice and wheat. This will offer farmers more choices and promote the cultivation of crops that align with market demand.
- Price deficiency payment schemes: Government compensates farmers for the difference between average prices in major mandis and the MSPs. (NITI Aayog).
Case study: Haryana's Bhavantar Bharapai Yojana government pays a fixed compensation against the produce sold below minimum support price (MSP)