Mentor’s Comment:

The question holds importance due to recent steep hike in the Minimum Support Price (MSP) for Kharif crops. Introduction should mention what is MSP and in general (short) talk about its importance.

Further, mention positive impact of recent MSP hike.

Next, talk how MSP will worsen the condition of the Farmer. Like hike will distort the pattern of production in agriculture as more profitable crop will find its place, it will make export difficult, higher food prices will worsen the condition, will hurt India’s long term growth and ultimately only rich farmers will benefit from this.

Next, mention what are the international perspectives on MSP hike and what lesson we learnt.

Further, mention what India can do and how for better dealing with the situation. One can mention the schemes like Raythu Bandhu which ensures DBT directly into beneficiaries account.

Model Answer:

The government recently announced steep hike in the Minimum Support Price (MSP) for kharif crops.

What is MSP?

• MSP is a form of market intervention by Central Government to insure agricultural producers against any sharp fall in farm prices, by guaranteeing minimum prices for their produce.
• MSP is announced by the Government at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).
• The minimum support prices are a guarantee price for their produce from the Government. The major objectives are to support the farmers from distress sales and to procure food grains for public distribution.

Positive Impact of MSP hike:

• Will increase the income of the farmers: The Government’s announcement to increase the MSP to 1.5 times the cost is laudable as it ensures that the farmers get a higher price and income.
• Will give boost to Agriculture growth rate: Hike in MSP will incentivize the Farmers to produce more which will give boost to Agriculture growth rate.

How MSP hike will worsen the condition of the Farmers:

Farmers should be treated as producers with internationally competitive potential, not as objects of charity. They should be encouraged and helped to grow items in which India is competitive, and discouraged from growing uncompetitive crops.

• Hike in MSP will distort pattern of production in agricultural field as, more profitable crop will find its place, and also higher price will benefit large farmers more.
• It will make exports difficult: The 50% margin over costs will raise prices above even their current uncompetitive levels, making exports even more difficult.
• A fixed mark-up over costs will encourage even greater use of purchased inputs and labour, which in turn will send MSPs even higher in a vicious circle.
• Higher food prices will worsen the condition of urban poor and Agriculture labourers: The urban poor will be badly affected, of course, but also agricultural labourers, the most vulnerable class. Agricultural labourers now outnumber cultivators. Further, the marginal farmers may also not produce enough food for their requirements and have to buy from the market.
• It will hurt India’s long-term growth: The RBI will seek to curb this by raising interest rates, hurting industry and export. This will dent India’s long-term GDP growth and prosperity.
• Only Rich farmers will benefit from MSP: almost 70% of farming households are unlikely to be beneficiaries of the MSP hike.

International Perspective on MSP hike-Lessons to be learnt

• The European Economic Community once tried something similar, offering prices to farmers well above global rates to make Europe self-sufficient in food, to provide food security in the event of war with the USSR
• High prices created unsold mountains of butter and meat and lakes of milk and wine
• These ultimately had to be disposed of by selling them at a throwaway price to the USSR, the supposed enemy
• Learning from this folly, Europe shifted its subsidies from crops to farmers
• Direct cash transfers to farmers replaced high prices for crops
• This finally brought supply and demand back in balance, eliminated huge surpluses, and still alleviated farm distress.

What can India do?

• India needs to learn from the EEC’s mistakes, not replicate them.
• Indian experience shows that subsidising goods (food, fertiliser, electricity, LPG) leads to large leakages to the undeserving and to middlemen.
• Experts estimate that three rupees of spending are needed to get one rupee through to beneficiaries.
• Direct benefit transfers to bank accounts work only if good financial and telecom infrastructure exist.
• A possible national strategy would start with preparatory efforts for good land records and financial infrastructure.
• Next should be phased moves to a cash grant of Rs 4,000 per acre per year, up to a limit of five acres per holding.

Way Forward:

• DBT will avoid the evils of cost-plus pricing and encouraging overproduction. It will limit the cost of farm rescues while benefiting small farmers most. It will curb gluts that depress prices.
• The schemes like Rythu Bandhu in Telangana and KALIA in Odisha is legend example in this regard. The centre should adopt such measures keeping in mind the deteriorating condition of farmers.