Legalising MSP: Challenges and way forward – Explained, pointwise

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After Govt’s recent decision to repeal three contentious farm laws, protesting farmer unions are now pressing for their demand of the legalisation of Minimum Support Price (MSP).

They want a legal guarantee for the MSP, which at present is just an indicative or a desired price.

Legalising MSP would put the government under a legal obligation to buy every grain of the crops for which MSPs have been announced.

At present, the PM has 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 entire issue of enforcing MSP legally, is tricky, complicated and a multidimensional one, involving lots of factors.

Let’s discuss them in detail.

What is the rationale behind the demand for legalisation of MSP?

Farmers receive less than MSP: In most crops grown across much of India, the prices received by farmers, especially during harvest time, are well below the officially-declared MSPs. And since MSPs have no statutory backing, they cannot demand these as a matter of right.

Limited procurement by the Govt: Also, the actual procurement at MSP by the Govt. is confined to only about a third of wheat and rice crops (of which half is bought in Punjab and Haryana alone), and 10%-20% of select pulses and oilseeds. According to the Shanta Kumar Committee’s 2015 report, only 6% of the farm households sell wheat and rice to the government at the MSP rates.

For instance:

About 80% of such wheat procured in 2020-21 is from Uttar Pradesh, Madhya Pradesh, Punjab and Haryana.

In paddy, West Bengal, Uttar Pradesh and Punjab accounted for over 38% of the total crop procured in 2020-21.

What do the farmer unions want?

Core demand: MSP based on a C2+50% formula should be made a legal entitlement for all agricultural produce. This would mean a 34% increase in the latest MSP for paddy and 13% increase for wheat.

MSP should also be extended to fruit and vegetable farmers who have been excluded from benefits so far.

What is MSP?

MSP is the minimum price a farmer must be paid for their food grains as guaranteed by the government. They are recommended by the Commission for Agricultural Costs and Prices (CACP) and approved by the Cabinet Committee on Economic Affairs.

The CACP submits its recommendations to the government in the form of Price Policy Reports every year.

After considering the report and views of the state governments and also keeping in view the overall demand and supply situation in the country, the central government takes the final decision.

Food Corporation of India (FCI) is the nodal agency for procurement along with State agencies, at the beginning of the sowing season.

Minimum support price (MSP) is set for 23 crops every year. They include:

– 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) and

– 4 commercial crops (sugarcane, cotton, copra and raw jute).

Note: The only crop where MSP payment has some statutory element is sugarcane. In this case, the statutory MSP is known as Fair and Remunerative Price (FRP). Sugarcane pricing is governed by the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act.
What is the importance of MSP and associated issues?

One of the major aims of MSP is to support the farmers from distress sales and to procure food grains for public distribution.

Read more here

How is MSP calculated?

MSP, presently, is based on a formula of 1.5 times the production costs.

The CACP projects three kinds of production cost for every crop, both at state and all-India average levels.

– A2 covers all paid-out costs directly incurred by the farmer — in cash and kind — on seeds, fertilisers, pesticides, hired labour, leased-in land, fuel, irrigation, etc.

– A2+FL includes A2 plus an imputed value of unpaid family labour.

– C2: Estimated land rent and the cost of interest on the money taken for farming is added to A2 and FL.

Must Read: Different types of production costs and formulas for calculating MSP

Farm unions are demanding that a comprehensive cost calculation (C2) must also include capital assets and the rentals and interest forgone on owned land, as recommended by the National Commission for Farmers.

Note: The CACP does not do any field-based cost estimates itself. It merely makes projections using state-wise, crop-specific production cost estimates provided by the Directorate of Economics & Statistics in the Agriculture Ministry. The latter are, however, generally available with a three-year lag.
What is the issue with the calculation of MSP?

In order to calculate MSP, the government uses A2+FL cost. The criticism of A2+FL is that it doesn’t cover all costs, and that a more representative measure, C2, needs to be used. For example, in the 2017-18 rabi season, CACP data shows that C2 for wheat was 54% higher than A2+FL.

The Swaminathan Commission had also stated that the MSP should be based on the comprehensive cost of production, which is the C2 method.

What are the challenges with the legalisation of MSP?

– Statutory MSP is unsustainable: A policy paper by NITI Aayog’s agricultural economist Ramesh Chand argued against legalising MSP. It reasoned that any fixed pre-determined price will push away private traders whenever production is more than demand, and there is a price slump in the market. This, in turn, will lead to government de-facto becoming the primary buyer of most farm produce for which MSP is declared, which is unsustainable. 

For instance: In August 2018, the Maharashtra government decided to amend the state APMC Act, making it illegal for a private trader to purchase any agricultural produce below the government-fixed MSP. The decision led to strong objection from traders who withdrew from the market as open market rates were lower than the government fixed price. Govt finally withdrew the proposal.

In the sugar sector, private mills have failed to make full payments to farmers, resulting in an accumulation of thousands of crores worth of dues pending for years.

Huge scope for corruption and recycling/leakage of wheat and rice, from godowns, ration shops or in transit.

– Disposal problems: While cereals and pulses can be sold through the public distribution system, disposal becomes complicated in the case of niger seed, sesamum or safflower.

– Inflation: Higher procurement cost would mean increase in prices of foodgrains, leading to inflation, which would eventually affect the poor.

– It will also impact India’s farm exports, if the MSP is higher than the prevailing rates in the international market. Farm exports account for 11% of the total exports of commodities.
– India’s price support measures have been continuously opposed by the developed countries at the WTO. India had invoked the Bali Peace Clause in 2020 because India had exceeded the ceiling on support it can offer farmers for rice in the year 2018-19. With a legally guaranteed higher MSP, India will face stiffer opposition at the WTO. The US had successfully won a case against China at the WTO in 2019 which was concerned with China’s domestic support to agriculture in the form of Market Price Support (MPS).

– It would lead to a huge burden on the exchequer, since the government would have to procure all marketable surplus in the absence of private participation.

– Demands from other sectors: If the Centre makes a law to guarantee 100% procurement in all the 23 crops where MSP is announced, farmers cultivating fruits and vegetables, spices, and other crops will also demand the same.
For more issues and challenges: Read here
What is the way forward?

If MSP is to be implemented:

– Taxing the rich farmers: As per Rajalakshmi Nirmal (HinduBusinessline), Small and marginal farmers whose only source of income is agriculture can be exempt from taxes, but the blanket exemption on agriculture income should be stopped. This means, the exemption would continue for roughly 86 per cent of the peasants of the country. The 14 per cent rich farmers should come forward to help the rest get MSP support.

Alternative measures:

– Price support measures: Govt can look at some alternative means of price support to farmers, like Madhya Pradesh’s Bhawantar Bhugtan Yojana (BBY).

For alternatives suggested by the experts instead of MSP and for measures to protect farmers from price fluctuations – Read here

Instead of bypassing the market by using MSPs, the government should make efforts to enable farmer participation in the market. Read here

– There is a growing consensus among economists for guaranteeing minimum “incomes”, as against “prices”, to farmers. That would require more direct cash transfers either on a flat per-acre (as in the Telangana government’s Rythu Bandhu scheme) or per-farm household (the Centre’s PM-Kisan) basis.

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