Minimum Support Price (MSP)

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Recently, the Central government has hiked the minimum support price (MSP) for paddy, pulses, and oilseeds. 

About

• This year, the MSP for bajra was set at 85% above the cost of production, while the MSP for urad and tur will ensure 60% returns. The MSPs for the remaining crops were mostly set around the stipulated 50% above the cost of production.
• MSP for common paddy increased to ?1,940 a quintal for the coming kharif season, less than 4% higher than last year’s price of ?1,868.

Minimum Support Price (MSP)

• The MSP is the rate at which the government purchases crops from farmers, and is based on a calculation of at least one-and-a-half times the cost of production incurred by the farmers.
• MSP is recommended by the Commission for Agricultural Costs and Prices (CACP).
• The Cabinet Committee on Economic Affairs (CCEA) approves MSPs.
• The Food Corporation of India (FCI) procures food grain under the price support scheme.
• MSPs are usually announced at the beginning of the sowing season.
• Government announces minimum support prices (MSPs) for 22 mandated crops and fair and remunerative price (FRP) for sugarcane. The mandated crops are 14 crops of the kharif season, 6 rabi crops and two other commercial crops. In addition, the MSPs of toria and de-husked coconut are fixed on the basis of the MSPs of rapeseed/mustard and copra, respectively. The 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 niger seed
  • Raw cotton
  • Raw jute
  • Copra
  • De-husked coconut
  • Sugarcane (Fair and remunerative price)
  • Virginia flue cured (VFC) tobacco

(Image Courtesy: IE)

Significance of MSPs

• Crop Diversification: There are slightly higher increases in the MSP for pulses, oilseeds and coarse cereals which helps in achieving the motive of diversifying crops.
• Differential Remuneration and protection to farmers: It helps in diversifying the crops in land use pattern. It protects farmers from the unwarranted fluctuation in prices provoked by the international level price variations. Any sharp fall in the market price of a commodity can be handled as MSP acts as a shock absorber.
• Mend demand supply imbalance: Concerted efforts were made to realign the MSPs in favour of oilseeds, pulses and coarse cereals. It encouraged farmers to shift to larger areas under these crops and adopt best technologies and farm practices, to correct demand – supply imbalance. 
• Focus on Nutri-Rich crops: The added focus on nutri-rich nutri-cereals is to incentivise its production in the areas where rice-wheat cannot be grown without long term adverse implications for groundwater table.
• Needs of consumers: MSP ensures that the country’s agricultural output responds to the changing needs of its consumers.  Ex: The government hiked the MSP of pulses to expand sowing of pulses.  
• Food Crops: The MSP incentivises production of a specific food crop which is in short supply.  
• Forward chain: The MSP leads to higher farm profits which encourage farmers to spend more on inputs, technology etc.
• Atma-nirbhar Bharat: To boost pulses and oilseeds production and reduce the country’s dependence on imports, the government increased the support price of tur by Rs 300 to Rs 6,300 per quintal for the 2021-22 crop year from Rs 6,000 per quintal last year.

Challenges 

• Protest by Farmers: Farm unions have been protesting for more than six months on Delhi’s outskirts, demanding legislation to guarantee MSP for all farmers for all crops, and a repeal of three contentious farm reform laws.
• MSP and Inflation: When announcing the MSP, inflation should be taken into account. But often the price is not increased upto that mark. Example, this time MSP for Maize has not even considered inflation then how it will benefit farmers! Also, frequent increase in the MSPs can lead to inflation too.
• High Input costs: The input costs have been rising faster than sale prices, squeezing the meagre income of the small farmers and driving them into debt.
• Lack of Mechanism: There is no mechanism that guarantees that every farmer can get at least the MSP as the floor price in the market. So proper mechanisms need to be fixed for all times to come.
• Restriction in Exports: Even after producing surplus grains, every year a huge portion of these grains gets rotten. This is due to the restrictions under WTO Norms, that grain stocks with the FCI (being heavily subsidized due to MSP) cannot be exported.
• Limited Awareness: Farmers, specially small and marginalised ones, are less aware about the time of announcement of MSPs. It leads to them being left out of the whole virtuous cycle.
• Economically Unsustainable: The economic cost of procured rice and wheat is much higher for the FCI than the market price of the same. Due to this, the FCI’s economic burden eventually will have to be borne by the Union government and may subsequently lead to divergence of funds from being invested in agriculture infrastructure.

NITI Aayog’s Recommendations

• Reform Measures: In its ‘Strategy for New India@75’ document, the Aayog suggested many reform measures to increase the farm sector growth and double farmers’ income by 2022.
• Minimum Reserve Price: The NITI Aayog should set up a group to examine replacing the minimum support price (MSP) by a minimum reserve price (MRP), which could be the starting point for auctions at mandis. The group should also examine if MSP can be fixed based on the three different criteria – surplus produce, products in deficit in the domestic market but available globally and products that are in deficit both domestically and globally.
• Alternatives to MSP: Examine options for including private traders operating in markets to complement the minimum support price (MSP) regime through a system of incentives and commission payments. 
• Agriculture Tribunal: The government should consider replacing the Commission on Agricultural Costs and Prices (CACP) by an agriculture tribunal in line with the provisions of Article 323B of the Constitution.
• Unified National Market: Raising MSP or prices can only be a partial solution to the problem of assuring remunerative returns to farmers, a long-term solution lies in the creation of a competitive, stable and unified national market to enable better price discovery and a long-term trade regime favourable to exports.
• Modernization: Modernising the agriculture sector through improving irrigation facilities, marketing reforms, post harvesting management and better crop insurance products.
• Contract farming & Future Trade: The report also advocated contract farming. Emphasis was laid on the need to encourage futures trade and removal of entry barriers to increase market depth. 
• Agricultural Export Policy: For farm exports, the government should come up with a coherent and stable agricultural export policy, ideally with a five to ten-year time horizon and a built-in provision for a mid-term review. 
• Maintain Food Security: Policy environment should facilitate income security to farmers, while maintaining the country’s food security. 

Way Forward

• The MSP shields farmers by guaranteeing a floor price for their produce and helps in achieving food security and tackle shortages of key food items. 
• In this importance of MSP, the Government and the Unions should amicably resolve the farmer issues so that it can benefit more than the harm it is causing. 
• Proper and rigorous implementation of ambitious projects like e-NAM, doubling farmer’s income by 2022, price stabilisation fund, recommendations of Swaminathan and Shanta Kumar committee is required.
• Strengthen the Farmers Producer Organization (FPO) in whole farm and non-farm sectors. It will increase bargaining power of farmers on one hand and provide a suitable investment climate on the other.
• Schemes like Bhavantar Bhugtan Yojana of Madhya Pradesh could be implemented nationwide. It focuses on providing farmers with the deficiency price. 

Sources: TH