MSP & policy alternatives for a fragile sector

THREE farm laws enacted by Parliament for improvement in the agricultural marketing system led to the eruption of farmers’ protests in August 2020. After prolonged agitation, the government repealed these laws in November 2021, but the farmers have once again resumed the protest, alleging that the government has failed to fulfil their demands, including that of a guaranteed minimum support price (MSP) for all crops.

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Declining agricultural incomes, rising production costs and shrinking employment opportunities have exacerbated the Indian agricultural crisis. It is impacting small and marginal farmers and agricultural labourers disproportionately. For millions of farmers, MSP is a beacon of hope, promising a reasonable return on their toil.

The high-level committee constituted by the Supreme Court of India, while sounding an alarm over the country’s agricultural crisis, has echoed the sentiments of the protesting farmers in recommending a loan waiver for farmers and the legal recognition of MSP to protect their income.

Historically, the MSP was introduced in 1965-66 to achieve increased foodgrain production by encouraging the adoption of high-yielding varieties of wheat and rice. It is an administered price of agricultural produce fixed by the Union Government for its purchase from farmers for the public distribution system (PDS) and to ensure that they get a reasonable margin on the cost of production. It also protects the farmers against a distress sale due to a drop in output prices during gluts.

However, more than 60 per cent of India’s population relies primarily on agriculture for its livelihood despite the sector contributing less than 20 per cent to the nation’s economic output. Unfortunately, the underlying core issues of the agricultural crisis have been pushed under the carpet due to the farmers’ protests for a legally binding MSP.

A legally binding MSP is necessary to make farming a more stable and successful business as no one will be able to purchase farm produce below this price, and doing so would be punishable by law.

The Standing Committee of Parliament on Agriculture, Animal Husbandry and Food Processing has also recently recommended the implementation of legally binding MSP for (a) safeguarding farmers’ livelihoods, promoting rural economic growth, and enhancing national food security; (b) stimulating economic activity in these areas and benefiting local businesses and economies; and (c) providing an assured income to farmers to encourage them to invest in agricultural practices, potentially increasing farm productivity and sustainability.

However, the MSP is only a part of the problem and farmers will still be struggling for optimum income due to small-sized and highly fragmented landholdings, increasing production costs, lack of demand-driven production and depleting natural resources, namely soil health and water, including groundwater.

Despite its appeal to the farmers, the guaranteed MSP may incentivise them to produce more without paying attention to the market demand and may increase the expenditure of the government and divert funds away from other crucial investments. The purchase of the surplus produce beyond the need for buffer stocks will lead to its offloading to the general public at a discount or losses during storage, causing a financial loss.

Further, the MSP also got tied up in the web of vote-bank politics to garner public support during the recent elections in Madhya Pradesh, Rajasthan and Chhattisgarh. These states fixed prices higher than the MSP fixed by the Union Government. Accordingly, apart from a guaranteed MSP, a comprehensive policy to address these concurrent concerns is required to put the agricultural sector back on the high growth path.

A new policy alternative may be to provide a region-specific rather than a pan-India universal MSP. The country should work out its requirement for cereals, pulses and oilseeds and then prepare an agricultural production plan for these quantities by identifying the ecologically benign areas for the production of these crops. The legally binding MSP only for identified crops in benign regions may be implemented; this will encourage the production of required crops as well as import substitution and can go a long way in improving the sustainability of Indian agriculture, apart from meeting the trade deficit.

Another option could be the introduction of two types of administered prices, as was adopted till the mid-1970s. It entailed an MSP below which the prices of commodities were not allowed to fall even in case of a bumper crop and a procurement price at which the cereals were domestically procured by public agencies for distribution through PDS. Such prices were fixed for paddy up to 1973-74 and for wheat from 1965 to 1969 and again in 1974-75.

A legally binding MSP worked out as per the recommendations of the Ramesh Chand Committee could be announced before the start of the sowing season. It could be (A2+ FL)+ 25 per cent as management and marketing charges and a procurement price of 1.5 times C2. Or, a slightly different one could be fixed before the start of the procurement season, keeping in view the domestic availability and demand, terms of trade, international prices, etc. However, no imports of agricultural commodities below the MSP should be allowed.

Another policy initiative to achieve the purpose of sustaining the fragile economy of the farmers and maximising agricultural production without the government having to physically acquire the produce may be the Price Deficiency Payment Scheme (PDPS). It proposes to compensate the farmers for the difference between the MSP and the actual market price.

In 2017, Madhya Pradesh and Haryana experimented with the PDPS as the Bhavantar Bhugtan Yojana. Under this, farmers were paid the difference between the MSP/monthly modal price and the actual sale price, subject to a maximum of 25 per cent of the MSP fixed for that season.

Based on their experience, the scheme can be modified to guarantee farmers a minimum price while saving the government from large-scale financial and logistical challenges of public procurement.

The Indian state may have a moral, but has no legal, authority to squeeze the agricultural profits of annadatas through price interventions to meet the needs of the consumers who cannot afford two square meals. At present, the MSP has become a peripheral instrument to fulfil the mandate of procurement of foodgrains for the PDS under the National Food Security Act 2013.

A consistent income due to MSP allows the farmers to plan better and maintain production without the fear of market fluctuations undermining their efforts. In his iconic Budget speech on July 24, 1991, the late PM, Manmohan Singh, had remarked that “markets can only serve those who are part of the market system.”

The wretched peasantry, which lives on the edges of a subsistence economy, cannot be left at the mercy of the markets for the sustainability of its income, rendering it unable to enjoy its rights for a minimal standard of living, health and dignity.

To ensure the sustainability and prosperity of agriculture, which is moving towards an ecological disaster, a tactical balance between economic viability and farmers’ welfare must be struck. A legally binding MSP, a crucial element of the agricultural price policy but no panacea for resolving the agrarian distress, is the minimum the government should do to keep the farmers in the business of supplying affordable food.