MSP legislation and its cost

Syllabus: General Studies Paper 3

Context:

Now that the three laws are set to be withdrawn, pressure is mounting on the government to implement the other, no less vociferous, demand by the farm unions: Providing legal guarantee for the minimum support prices (MSP) of crops.

MINIMUM SUPPORT PRICE

• The MSP is a guarantee that acts as a safety net for farmers while selling their crop, the minimum price for any crop that government considers remunerative for farmers.
• The Centre presently announces the MSPs of 23 crops-
• 7 cereals – paddy, wheat, maize, bajra, jowar, ragi and barley)
• 5 pulses- chana, tur/arhar, moong, urad and masur)
• 7 oilseeds- rapeseed-mustard, groundnut, soyabean, sunflower, sesamum, safflower and nigerseed)
• 4 commercial crops- sugarcane, cotton, copra and raw jute

Calculation of MSP

• The price policy reports every year are submitted as a parts of its recommendations by CACP .
• The state wise, crop specific production cost estimates provided by Directorate of Economics & Statistics in the Agriculture Ministry are used by CACP to make its projections

Farmers’ Demand Of Legalizing MSP

• Right to demand MSP– Since MSPs lack statutory backing, farmers cannot demand them as a matter of right. The farmers cannot be left at the mercy of market forces.
• Ground realities-The prices received by farmers, especially during harvest time, are well below the officially-declared MSPs in most crops grown across much of India. The MSPs technically ensure a minimum 50% return on all cultivation costs, but the benefits are largely on paper.
• According farm unions, C2+50% formula should be made a legal entitlement for all agricultural produce, so that every farmer of the country can be guaranteed at least the MSP announced by the government for their entire crop.
• The farm union has suggested a law which simply stipulates that no one neither the Government nor private players would be allowed to buy produce from the farmer at a rate lower than MSP.
• Effective implementation-MSP implementation has been effective only in four crops (sugarcane, paddy, wheat and cotton); partly so in five (chana, mustard, groundnut, tur and moong) and weak/non-existent in the remaining 14 notified crops.
• Livestock and horticultural produce –there is no MSP even on paper, be it – be it milk, eggs, onions, potatoes or apples.
• The 23 MSP crops together, in turn, account for hardly a third of the total value of India’s agricultural output, excluding forestry and fishing.
• All farmers groups seeking a legal backing for MSP also want it extended to fruit and vegetable farmers who have been excluded from benefits so far.
• Private traders should bear the cost– One of the farm unions, has suggested that the most of the cost should be borne by private traders. According to them, both middlemen and corporate giants are buying commodities at low rates from farmers and earning huge margins before selling to end consumers.
• Agro-climatic zones- Some farm unions have demanded a law to guarantee remunerative prices for all farmers to be calculated according to the varied input rates in 15 different agro-climatic zones.

Ways For Implementation of the Entitlement

There are basically three ways-

Forcing private traders or processors to pay MSP

• This is already applicable in sugarcane. Sugar mills are required, by law, to pay farmers the Centre’s “fair and remunerative price” for cane, that is even fixed higher than advised prices by some state governments.
•  The Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act, moreover, obliges payment of legally-guaranteed price within 14 days of cane purchase.

Procurement at MSP through government agencies 

• Government through its agencies such as the Food Corporation of India (FCI), National Agricultural Cooperative Marketing Federation of India (Nafed) and Cotton Corporation of India (CCI) can procure crops at MSO
• According to data, such purchases accounted for nearly 50% of India’s rice/paddy production last year, while amounting to 40% for wheat and over 25% in cotton.

Price deficiency payments

•  Under it, the government neither directly purchases nor forces the private industry to pay MSP. Instead, it allows all sales by farmers to take place at the prevailing market prices. Farmers are paid the difference between the government’s MSP and the average market price for the particular crop during the harvesting season.

Government’s Stand

• Committee for MSP– The Prime Minister announced the formation of a committee to make MSP more transparent, as well as to change crop patterns and to promote zero budget agriculture which would reduce the cost of production.

• The panel will have representatives from farm groups as well as from the State and Central Governments, along with agricultural scientists and economists.

• According to a policy paper by NITI Aayog– Economic theory as well as experience indicates that the price level that is not supported by demand and supply cannot be sustained through legal means. It also offers two failed examples of such a policy-

• The sugar sector
  • The private mills are mandated to buy cane from farmers at prices set by the Government.
  • Faced with low sugar prices, high surplus stock and low liquidity, mills failed to make full payments to farmers, resulting in an accumulation of thousands of crores worth of dues pending for years.
• Maharashtra Law
  • The amendment to the Maharashtra law in 2018 penalised traders with hefty fines and jail terms if they bought crops at rates lower than MSP.
  • As open market prices were lower than the (legalised) MSP levels declared by the State, the buyers withdrew from the market and farmers had to suffer and the move was soon abandoned.
• Increased Fiscal Burden
  • Legalising MSP would put the government under a legal obligation to buy every grain of the crops for which MSPs are announced.
  • According to rough estimates, the Union government will have to spend Rs 17 lakh crore.Also, the government will have to spend a huge amount of money to create the facilities required to store the procured grain.
• Fear of price rise & inflation
  • There will be a price rise and increased inflation in general if centre makes MSP a legal mandate to ensure that private players or government agencies buy the crops at least at the fixed price anywhere in the country

Case Study Of The United States

• The United States, during the presidency of Jimmy Carter between 1977 and 1981- To alleviate the economic condition of dairy farmers, Carter announced that the price of milk would go up by 6 cents per gallon every 6 months. But to maintain these prices, the Carter administration had to increase the demand for milk.
• It chose to do so by offering to buy as much cheese as anyone would sell to the government at a predesignated price. This was, in essence, a ‘guaranteed MSP’.
• As the months and years rolled by, more and more cheese was produced and sold to the government.
• Dairy farmers were happy with higher milk prices, and kept increasing production far in excess of the real demand. Most of the milk went into making cheese, which was then sold to the government.
• Gradually, the government ran out of space, and had to rent several caves to store the cheese. By 1981, Carter’s dairy support programme was costing American taxpayers $2 billion every year, while the government was stuck with mountains of unutilised cheese.
• The successor administration stopped the automatic increases in prices, gave the cheese away for free, and paid dairy farmers to cut down on the production of milk.

Lessons India can learn

• MSP since decades- India has had MSPs for several crops for several decades now, but that has not resolved the problem of agrarian distress.
• Unintended consequences-A guaranteed MSP can have quite a few unintended consequences that might make the attempted cure worse than the disease.
• People dependent on agriculture-In India, the percentage of people involved in agriculture is far higher, and they are far more economically distressed than any Western country.
• Lack of feasibility & sustainability-A legally mandated MSP regime is likely to be neither feasible nor sustainable in the long run. The grain stocks already lying with the government are more than twice its buffer requirement, and sometimes end up rotting

Way Forward

• Ramp up investment in the agriculture sector-
• better irrigation facilities
• easier access to credit
•  timely access to power
•  ramping up warehouse capacity and extension services, including post-harvest marketing.
• Increasing participation of farmers in market 
• The government should make efforts to enable farmers to participate in the market instead of bypassing the market by using MSPs
• Raising the farmers’ bargaining ability and choices before them
• Solution outside the Agricultural sector
• Non remunerative agriculture- Agricultural sector employs 55% of Indian population but accounts for just 17% of country’s GDP
• Boosting India’s industrial & services sectors-The excess labour, presently engaged in unremunerative farm activities can be soaked up by these two sectors.
• However, the data show that manufacturing lost half its jobs between 2016 and 2019, even before the COVID pandemic. Post pandemic, there is a trend of more and more people re-joining agriculture.
• Rapid growth of industries and services for the next couple of decades could alleviate India’s farm distress

The Indian express link

https://indianexpress.com/article/explained/what-meeting-msp-demand-would-cost-govt-farm-laws-7646398/

Question- Legalising Minimum Support Prices (MSP) can have strong economic repercussions in the future. Suggest measures other than MSP which can help reduce agrarian distress.