Does a legally binding MSP benefit farmers, agriculture, and the economy?

The ‘Delhi Chalo’ protests by farmers revolve around the primary demand for a legally binding Minimum Support Price (MSP) for all 23 major agriculture crops, with the added condition that the MSP must align with the Swaminathan Committee’s recommended formula. A legally binding MSP implies that no one can buy from the farmers at a price below the MSP, and any violation can lead to punishable offences. Additional demands include pensions for farmers, loan waivers, and the withdrawal of cases against previous protestors.

India implemented the MSP system in the 1960s, initially for wheat, later expanding to include other crucial crops for the sake of food security. The MSP is not compulsory for private traders when acquiring food grains; instead, it serves as a reference price guiding government and agency procurement of specific food grains from farmers, preventing the adverse impact of market fluctuations.

Farmers often face a decline in the prices they receive, especially during periods of excess production, reaching levels that do not cover their initial investment. So, when market prices fall drastically, farmers can rely on the MSP for support. However, when prices are higher, farmers have the flexibility to sell their produce at a higher price.

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MSP for 23 crops is declared every year before the Kharif and the Rabi seasons, which is determined by the Commission for Agricultural Costs and Prices (CACP) recommendations. These crops include various food grains, including cereals, coarse grains, and pulses. However, the benefits of the MSP are mostly directed towards wheat and paddy producers, as the Centre procures and stores it in its vast storage system. The procured grains are used for the Public Distribution System (PDS) and welfare schemes and are held in reserve as a buffer stock.

The demand for a legally binding MSP arises from the pressing issue of low farmer incomes. Supporters of MSP believe it will encourage farmers to diversify their crops, reducing dependency on water-intensive ones like paddy and protecting them from market risks. Also, increased income could encourage investment in technology, enhance productivity, and shield farmers from exploitation by middlemen. However, accepting the MSP demand can have significant economic implications, including putting severe pressure on the fiscal burden and raising food inflation.

Challenges linked with MSP

What challenges are associated with an MSP? In the market, if the commodity’s price is high for the consumer, it will not consume it, and its demand will drastically reduce. In this scenario, the MSP is ineffective because most of the commodities would remain unsold. In such a scenario, for MSP enforcement, the government must step in as a consumer and procure the commodities. However, this process extends beyond procurement – the government must establish adequate infrastructure to store all purchased commodities.

Currently, the government predominantly procures wheat and paddy for the PDS and maintains a buffer stock. Excess grains procured are released into the open market to bring down high prices. Essentially, the government acquires commodities from farmers at a higher price and later sells them on the market to stabilise prices. Unfortunately, this system often benefits middlemen operating procurement centers.

The question arises: if the government procures all crops, are there sufficient storage facilities to manage this agricultural produce effectively? Moreover, from where will the funds to procure all crops be sourced? The options include potential reductions in the budget allocation for agriculture, diverting resources from other vital sectors, or a substantial increase in government debt. Essentially, the MSP system is unsustainable and poses a significant threat to government finances. Furthermore, it has the potential to be detrimental to the agriculture sector in the long run, leading to over-cultivation and exacerbating storage challenges. While MSP serves as a mechanism to lessen inherent farming risks, it is inadequate for managing the transitions required to address medium-term issues like shifts in cropping patterns.

To address the fundamental concern of the farmers’ demand, which is protecting and enhancing their incomes, an effective approach is to enhance productivity and facilitate access to markets. Although enhancing productivity is time-consuming as it requires high investments in agricultural research and development and irrigation, the issue of accessing the markets can be addressed relatively quickly.
To safeguard farmers from market risks, a legally enforceable MSP may be feasible only if the MSP covers production costs and, if required, with a small profit margin. A much higher MSP can result in the government being the sole consumer, making this condition unsustainable. Additionally, to incentivise farmers to diversify their crops, a scheme like “Mera Pani Meri Virasat” introduced by the Haryana government can be adopted. The scheme provides ₹7,000 for every acre that is diversified away from Paddy and alternative crops are grown.
Apoorva Ramachandra is a Research Associate at the Centre for Development Policy and Practice (CDPP). Her areas of research include development economics, education, and gender.

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