A comprehensive analysis of MSP

 Context:

Recently, the cabinet has increased the Minimum Support Prices (MSP) for kharif crops.

What is MSP?

MSP is the minimum price paid to the farmers for procuring food crops.
MSP is announced by the Government at the beginning of the sowing season.
They are recommended by the Commission for Agricultural Costs and Prices (CACP) and approved by Cabinet Committee on Economic Affairs.

Formula for calculating MSP:

For calculating MSP, the CACP considers factors such as cost of production, change in input prices, market price trends, demand and supply, and a reasonable margin for farmers.

The CACP projects three kinds of production cost for every crop both at the state and all—India average level. These three production costs includes:
A2: It covers all paid-out costs directly incurred by the farmer in cash and king on seeds, fertilizers, pesticides, hired labour, leased-in land, fuel, irrigation etc.
A2+FL: It includes A2 plus an imputed value of unpaid family labour.
C2: It is a more comprehensive cost that factors in rental and interest forgone on owned land and fixed capital assets, on top of A2+FL.

Procurement under MSP:

1. The Food Corporation of India is the nodal agency for procurement along with State agencies.
2. FCI establishes purchase centres for procuring food grains under the price support scheme.
3. While, the State government decides on the locations of these centres with the aim of maximizing purchases.

MSP is declared on the following commodities:

1. Cereals (7) – paddy, wheat, barley, jowar, bajra, maize and ragi
2. Pulses (5) – gram, arhar/tur, moong, urad and lentil
3. Oilseeds (8) – groundnut, rapeseed/mustard, toria, soyabean, sunflower seed, sesamum, safflower seed and nigerseed
4. Copra
5. De-husked coconut
6. Raw cotton
7. Raw jute
8. Sugarcane (Fair and remunerative price)
9. Virginia flu cured (VFC) tobacco

Need for MSP:

1. The share of agriculture in India’s GDP has fallen and almost half of India’s population is still dependent on agriculture for livelihood.
2. It protects farmers from any sharp fall in the market prices of a commodity.
3. MSP are announced at the beginning of the sowing season, this helps farmers make informed decision on the crops they must plant.
4. MSP is a tool to achieve food security. It provides security to farmers from the risk of crop failure and less production.
5. MSP is used as a tool to incentivize production of specific food crops which is short in supply.
6. Slow farm growth and increasing farmer’s distress demand for more MSP for farmers.It will enhance purchasing capacity of farmers.
7. MSP motivates farmers to grow targeted crops and increased production.
8. Minimum prices ensured for the crops thereby hedging them from market fluctuations.
9. It helps famers from price fluctuations and market imperfection.

Various problems related to MSP:

1. Crop production:

The crop production is still unviable.
The support prices that are being provided do not increase at par with increase in cost of production.

2. MSPs have unequal access:

The benefits of this scheme do not reach all farmers and for all crops.
There are many regions of the country like the north-eastern region where the implementation is too weak.

3. Procurement related problems

:Almost 2/3rdof the total cereal production is taken through the route of MSP, leaving only 1/3rd for open market.
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.
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.
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
Many famers due to lack of awareness about MSP are far away from FCI procurement areas.

4. Excess storage:

This kind of procurement without sufficient storage has resulted in huge piling of stocks in the warehouses.
The stock has now become double the requirements under the schemes of PDS, Buffer stock etc.

5. Issues in WTO:

India’s MSP scheme for many crops has been challenged by many countries in the WTO.
For example, Australia has complained of the MSP on wheat, US and EU complained of sugarcane and pulses MSP.
They have been claimed to be highly trade-distorting by its method of calculation.
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.

6. Market distortion:

It distorts the free market.
It favours some particular crops over other crops.
Not all farmers have been able to get the benefits of MSP because of lack of awareness.
Higher MSP over-incentivise production leading to supply glut.
Hikes in MSP also adversely affect the exports by making Indian farm goods on competitive especially when international market prices are lower.
It does not cover perishables.

7. Ecological problem

MSP lead to non-scientific agricultural practices whereby the soil, water are stressed to an extent of degrading ground water table and salinisation of soil.

8. Killing of competition

Any interference by the government kills the competition. This affects the agents who procure the crops at lower prices and sell them at higher prices and earn profits. This mainly disturbs the working of people who sell these outputs from farmers into the open market.

Various committees on MSP:

National Commission on Farmers:

• The National Commission on Farmers (NCF) was constituted on November 18, 2004 under the chairmanship of Professor M.S. Swaminathan.
• The reports contain suggestions to achieve the goal of “faster and more inclusive growth” as envisaged in the Approach to 11thFive Year Plan.
• The Swaminathan Committee widely disseminated recommendations, to fix minimum support prices(MSP) for crops at levels” atleast 50 per cent more than the weigted average cost of production.

Ramesh Chandra Committee:

• It was constituted to examine the methodological issues in fixing MSP.
• The Commission suggested that for calculating production cost, family labour head should be considered as skilled worker.
• The interest on working capital should be given for the whole season.
• Post harvest costs, including cleaning, grading, drying , marketing and transportation should be included.
• The committee recommended that the cost 2 should be raised to 10% account for risk premium and managerial charges.

Way ahead:

1. Instead of relying on MSP alone, the government needs to explore alternate models to boost farmer’s income.
2. NITI Aayog is already working on alternative mechanism.A counterpart of the MSP is the Market Intervention Scheme (MIS), under which the state government procures perishable commodities like vegetable items.
3. Procurement system of the government needs to be streamlined.
4. To solve the problem of MSP, Both NITI and Economic Survey recommend Price Deficiency Payment (PDP).
5. Declare MSP for all types of crops.
6. Easing the role of procurement agencies and minimizing storage losses and costs.
7. As an alternative, Inputs subsidy policy should have been formulated to watch the interest of the farmers.
8. Some states like Madhya Pradesh have launched price deficit financing schemes(BhavantarBhugtanYojana), in which the government pays the farmers the difference between modal rate (the average prices in major mandis) and the minimum support prices (MSPs). The scheme appears to be a better alternative,which faces challenges of storage and liquidation.
 

By: Priyank Kishore