Context: Recent protest by farmers, demanding legalization of MSP and revision of MSP to C2 calculation method has given rise to debates regarding utility and issues of MSP regime in Indian economy.
What is Minimum Support Price (MSP)?
- Minimum Support Price (MSP) 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.
- List of crops are 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
- Raw jute
- Copra
- De-husked coconut
- Sugarcane (Fair and remunerative price)
- Virginia flu cured (VFC) tobacco
Origin of MSP in India:
- In the early 1960s, India was facing an enormous shortage of cereals. In this regard, new agricultural policies were born marking the start of the Green Revolution.
- In 1964, the government set up the Food Corporation of India (FCI) to procure food grains from farmers at remunerative prices, and through the public distribution system distribute them to consumers and maintain buffer stock for food security.
- To buy food grains, there had to be a policy on pricing. In 1965, an Agricultural Prices Commission was set up to advise on the pricing policy for agricultural commodities and its impact on the economy.
- It was then that the Price Support Policy of the Government came in, providing a fool proof solution to agricultural producers against a sharp fall in farm prices. The minimum guaranteed prices are fixed to set a floor below which market prices cannot fall. If no one else buys it, the government will buy the stock at this minimum guaranteed price. This is what came to be known as the minimum support price or MSP.
Determination of MSP in India
Factors considered:
- Cost of production
- Changes in input prices
- Input-output price parity.
- Trends in market prices
- Demand and supply.
- Terms of trade between agriculture and non-agriculture
- Inter-crop price parity
- Effect on industrial cost structure.
- Effect on cost of living.
- Effect on general price level.
- International price situation
- Parity between prices paid and prices received by the farmers.
- Effect on issue prices and implications for subsidy.
- NOTE: The pricing of sugarcane is governed by the statutory provisions of the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act (ECA), 1955. So, there is a statutory binding on the sugar factories to pay the FRP declared by the government each year.
Benefits of MSP:
Issues and challenges with MSP regime:
- MSP is calculated based on A2+FL cost and not based on C2. Swaminathan commission had recommended C2 cost based calculation.
- MSP calculated is based on average cost taken for the whole of country. But there is a substantial regional variation in production cost of different crops.
- Lack of awareness among farmers. Case study of farmers in Chittorgarh in Rajasthan, where majority of farmers were neither aware about MSP nor how it worked no about the prices of crop at which procured it. The awareness on mandi was also low.
- Disproportionate procurement model- rice and wheat account for major share under MSP procurement.
- Regional disparity- States like Punjab and Haryana account for disproportionately larger share in procurement under MSP.
- Lack of comprehensive coverage- Shanta Kumar Committee has highlighted that only 6% farmers have benefitted from MSP program.
- Market fragmentation- when MSP is higher than international prices of crops then farmers avoid exporting of agricultural produce, whereas if international prices are higher than MSP then farmers go for exporting their produce, thereby creating a scarcity of food grains in domestic market, giving rise to food inflation.
- Hampering agricultural diversity- MSP model of procurement has promoted monocultural cropping in terms of rice and wheat, making India one of the largest importers of oilseeds and pulses globally.
Demand of farmers:
- Legalisation of MSP: The farmers have been protesting for getting legal status for MSP, to insulate themselves from market volatility in price of crops. But the government and some critics have argued that legalization of MSP could have fiscal cost amounting to 18 lakh crores annually.
- Giving statutory status to CACP: Farmers have been demanding that CACP is not independent body, as all its members are appointed by government with no representation of the farming community. Thus, there been calls for giving statutory backing to CACP with adequate representation to farmers also.
- Changing the formula for computing MSP based on C2, rather than the current formula on A2+FL, thereby ensuring higher incomes for farmers.
Way Forward:
- Building awareness regarding MSP among farmers- organising awareness drives, pushing the government agencies to foray into areas that have still not been covered for procuring directly from farmers rather than farmers coming to the agencies.
- Role of farmers in MSP calculation- Including and encouraging the farmer bodies and associations to take part in MSP calculation.
- Increasing capital expenditure in agriculture in terms of investment in agricultural Research and Development.
- Formal credit for farmers- streamlining the flow of formal credit to farmers, specially small and marginal farmers.
- Increasing accessibility of farmers to Mandis or agricultural markets.
- Expanding open market sales and export of existing stock of food grains beyond the strategic reserve.
- Swaminathan Commission Report (National Commission on Farmers):
- Ensure that women farmers have the needed support services and have access to timely credit and extension services.
- Setting up of a National Board for Women in Agriculture under Ministry of Agriculture.
- Establishing Farm schools to spread the message and methods of innovative farmers.
- Code of conduct for contract farming and amendments in the APMC acts and Essential Commodities Act.