Minimum Support Price

Introduction

1. The Minimum Support Prices were announced by the Government of India for the first time in 1966-67 for wheat in the wake of the Green Revolution and extended harvest, to save the farmers from depleting profits.

2. Since then, the MSP regime has been expanded to many crops.

3. Minimum Support Price is the price at which government purchases crops from the farmers, whatever may be the price for the crops.

Crops Covered

The MSP is announced by the Government of India for 25 crops currently at the beginning of each season viz. Rabi and Kharif. Following are the 25 crops covered by MSP

Rationale behind MSP

If there is a fall in the prices of the crops, after a bumper harvest, the government purchases at the MSP and this is the reason that the priced cannot go below MSP. So this directly helps the farmers.

How MSP is decided?

The government decides the support prices for various agricultural commodities after taking into account the following:

Recommendations of Commission for Agricultural Costs and Prices
Views of State Governments
Views of Ministries
Other relevant factors.

Various Issues around MSP

1. The Crop production is still unviable despite of so many years of crop production

1. Even after so many years of operation, the crop production is still increasingly unviable.

2. The support prices that are being provided do not increase at par with increase in cost of production.

3. A rating agency, CRISIL pointed out that the increase in MSP has indeed fallen in the years between 2014-17.

4. While in the years 2009-13, the annual growth of MSP was around 19.3%, it has become only 3.6% in 2014-17.

5. It has been observed that this decrease in MSP has contributed further to the acceleration of distress of farmers.

6. This deceleration in rates especially at a time when agricultural prices in domestic market have become equivalent to the international prices, leading to rise in competition from low cost imports.

2. Unequal access to MSPs

1. This problem has been in existence since the creation of this scheme.

2. The benefits of this scheme do not reach all farmers and for all crops.

3. There are many regions of the country like the north-eastern region where the implementation is too weak.

3. Effects of Inflation on MSP

1. There are instances of procurement below MSP as procurement is tardy and trade and other policies sometimes reduce the market prices during good harvest years also.

2. It has an impact on inflation.

3. Lower the market price; lower the MSP and eventually market prices become dependent on MSP due to market intervention measure.

4. Disadvantages of procurement

1. Almost 2/3rd of the total cereal production is taken through the route of MSP, leaving only 1/3rd for open market.

2. As a result, a farmer who chooses the MSP route cannot take advantage of beneficial market prices and has to depend solely on the MSP.

3. It prevents earning of profit by producers. This has created shortage of crops in the open market also which has a serious impact on consumption pattern.

4. It has shifted consumption towards non-cereal foods (that are available more in open market relatively), but production has not risen simultaneously, causing a production-demand gap.

5. Excess storage

1. This kind of procurement without sufficient storage has resulted in huge piling of stocks in the warehouses.

2. The stock has now become double the requirements under the schemes of PDS, Buffer stock etc.

3. So, many grains have rotten in the storages.

6. Issues in WTO

1. India’s MSP scheme for many crops has been challenged by many countries in the WTO.

2. For example, Australia has complained of the MSP on wheat, US and EU complained of sugarcane and pulses MSP.

3. They have been claimed to be highly trade-distorting by its method of calculation.

4. If the current process continues, the country will face international criticism for breaching the 10 per cent norm for subsidy on farm production set by the WTO.

Rectifying Measures

1. Recent budget initiatives

1. In latest budget, states have been allowed to intervene in the agricultural markets to ensure that the prices do not fall sharply.

2. The Centre will be bearing 40% of the losses that the states suffer and in case of northeastern states the Centre will bear the loss upto a limit of 50%.

3. The coverage will be of every commodity except rice and wheat. This scheme has been named as ‘Market Assurance Scheme’.

2. WTO negotiations

1. India has been able to gain some time by pushing for inclusion of a peace clause in the 2013 Bali Conference wherein every country agreed not to charge another country for its subsidy scheme until a permanent solution is drawn.

2. Although the solution is yet to be drawn, the deadline for its activities are nearing, requiring immediate efforts.

3. Priority based procurement

1. The procurement must be done on priority basis for the states or farmers who are more in distress and require immediate assistance.

2. It should be ensured that the MSP does not cause fall in prices due to the interventionist measures.

3. Even after so much of criticism, it is undoubted that the scheme is a necessity in times of distress.

4. There is a need to consolidate and relook into the scheme and ensure that it is properly implemented.

4. MSPs and Budget 2018-19

1. In the recent budget, the government has declared that the MSP for kharif will be above the production cost.

2. However the production cost is calculated in three different manners by the CACP which creates huge difference in the final MSP calculated.

3. Three production costs are:

A2 which is the actual paid out cost. It includes expenditure done on seeds, fertilizers, hired laborers, leased land, hired machinery etc.
A2+FL which is actual paid cost plus the value of family labor.
C2 which is the comprehensive cost which includes rent of own land and interest on own capital.

4. So, it is called as misleading announcement as there is no clarification regarding which production cost will be taken.

5. Speculations are rife that the government has done announced it above A2 and A2+FL.

6. Whereas it has been a long demand of the farmers to consider the cost of production-C2.

7. The same has been recommended by National Commission on Farmers in 2006 headed by M.S Swaminanthan.

8. Further, there are other concerns of the farmers as follows:

For the last 10 years MSP for kharif crops is already above A2 and A2+FL. But MSP declared currently does not give them enough or reasonable returns over the cost incurred by the farmers. At the same time experts are of the view that it is unlikely that the government will consider C2 as the cost of production because of increase burden of money that the government will have to shelved out of the their pockets.
Cost of factors of production has been fixed and it does not take into account the changing cost due to inflation etc.
Ensuring high MSP is not the panacea for increasing farmer’s income. Apart from current 25 crops, MSP for fruits and vegetables should also be announced.
Procurement system of the government needs to be streamlined. This is because many times the government does not procure on time leading to distress selling by farmers.