Issues related to Minimum Support Price in India

Minimum Support Price

Definition: MSP is a part of India’s Agriculture Price Policy. MSP is the price at which the government purchases crops from the farmers. MSP is the guaranteed ‘minimum floor price’ that farmer must get from the government in case the market price of the crops falls below the MSP. The Rationale behind MSP is to support the farmer from excess fall in the crop prices.

The MSP for various crops is announced by the central government at the beginning of every crop seasons on the recommendation of CACP. The MSP is a fixed assured price that farmers gets in case price falls heavily due to a bumper harvest. MSP in a sense work as an insurance policy for the farmers to save them from price falls.

The most important aim of the MSP policy is to save the Indian farmer from making distress sales. In the event of glut and bumper harvest, when market prices fall below the announced MSP, the government through its agencies buys the entire stock offered by the farmers at the MSP.

MSP is currently announced for 24 commodities including

• Seven cereals: Paddy, Wheat, Jowar, Bajra, Barley, Maize and Ragi.
• Five Pulses: Gram, Arhar, Moong, Urad and Lentil.
• Eight Oilseeds: Groundnut, Rapseed/Mustard, Toria, Soyabean, Sunflower, Sesamum, Niger seed and Safflower seed.
• Cash Crops: Raw Cotton, Copra, Raw Jute and Virginia Flu Curved Tobacco.

MSP: Historical Context

The system of MSP in India was started in the mid 1960’s amid food shortages. The idea was to create a favourable environment and incentivise farmers to increase production by adopting “High Yield Variety” seeds and technology for cereals like Wheat and Rice.

The adoption of the MSP Policy in India was mainly due to food scarcity and price fluctuations provoked by drought, floods and international prices for exports and imports. The policy, in general, was directed towards ensuring reasonable food prices for consumers by providing food grains through Public Distribution System (PDS) and inducing adoption of the new technology for increasing yield by providing a price support mechanism through Minimum Support Price (MSP) system.

In order to provide farmers an assured price for their crops and motivating them to adopt advanced technology to increase production the Agricultural Price Commission was setup in the year 1965 (Renamed as Commission for Agriculture Cost and Price in 1985) on the recommendation of LK JHA Committee. The role of Agriculture Price Commission is to advise government on agriculture price policy.

Calculation of MSP

The CACP in deciding the MSP for various crops takes into account a lot of comprehensive factors including the supply and demand factors of each crop.

The Initial Success of the MSP Policy

The drawbacks of the MSP Policy

The Current situation of MSP

The most important goal of any long-term agriculture development policy in India should be to promote agriculture growth along with regional equity and natural resource sustainability. The regional equity and resource sustainability is a precondition for achieving nutritional security and balanced production. However, the system of the MSP has failed to achieve this objective of sustainability.

In order to make MSP relevant and efficient, the government have to revamp the policy.

1. MSP is announced for 24 commodities after which starts the operational part of procurement of the commodities. The procurements are made at the MSP price and government has to ensure that farmers do not get the price below MSP. However, it has been found that there exists no mechanism on the ground that ensures that farmers are paid the MSP. It has been noticed that many times farmers are forced to make distress sale at a price below the MSP.
2. For instance, it does not matter for producer of pulses or oilseeds anywhere in the country or for paddy and wheat farmers in Chhattisgarh, Orissa, Assam, Bihar and a majority of the other states whether the CACP recommends Rs 500 or Rs 5,000 per quintal for their crop as there is no enforcement of the MSP in these cases. In these cases, the long exercises and recommendations made by the CACP remain only on paper.
3. To make MSPs relevant to the country’s present situation requires changes in the criterion used by the CACP to arrive at MSPs and ensuring that MSPs are effectively implemented where they are meant to be implemented.
4. The CACP must consider both Demand and Supply factors while deciding the MSP. For instance, CACP main criteria in deciding the MSP is to take into account cost of production. The CACP completely ignores the demand side factors. When the demand for commodities are falling, and if at that time MSP is kept high, then it will lead to excess supplies and increase in government buffers stock which will be kept idle and will get wasted. In all such situation, it is important that MSP should be derived based on demand and supply factors.
5. Due to distorted MSP, inefficiency builds in into the system, and the farmers do not bother if growing a particular commodity on land that is unsuitable for its production will raise its cost and make land non-productive in the long run.

For instance, this is exactly what has happened in the case of extension of rice cultivation to the semi-arid regions and sandy soils in states like Punjab and Haryana, which is creating a host of environmental and natural resources problems in addition.

1. Fixing MSP for political reasons and under the pressure of the farmer leaders leads to a total neglect of societies preference for commodities. It also leads to serious imbalances where what is being demanded is not being produced and what is not being demanded is being produced in the economy. It would also require the government to buy produce all the time and everywhere if the MSP ignores demand-side factors.
2. Everyone in India including political leaders are convinced that the agrarian crisis and farmer distress are mainly because of low levels of MSP. The quick solution reached by them is therefore to increase the MSP. However, a comprehensive analysis and correct understanding of agricultural situation reveal that the problem lies elsewhere.
3. The Indian agriculture suffers from twin problems of lack of viability of practising agriculture due to the small and marginal size of land holdings and high volatility in farm sector due to monsoon failures and lack of irrigation.
4. The small size of land holdings, low productivity, increasing production costs, shrinking employment opportunities outside agriculture, and declining growth rate in agriculture are all major serious issues which cannot be simply resolved by increasing the MSP.
5. For instance, according to the 70th round survey of the NSSO (2014), the estimated number of agricultural households (AHHs) in India is 90.2 million, who constitute 57.8% of the total estimated rural households (156.14 million). Clearly, 42.2% of rural households (RHHs) are without any agricultural land.

Among the AHHs, 2.65% have only 0.01 hectares (ha) of land and are simply notional AHHs. Another 31.89% AHHs have land between 0.1 ha and 0.4 ha, and 34.9% have land between 0.41 ha and 1 ha. These three categories of AHHs account for 69.44% and are classified as marginal farmers. If we add small farmers (17.14%), the proportion of marginal and small farmers comes out to be 86.58% of the total.

The average size of the marginal holdings is only 0.41 ha (one acre), and that of smallholdings is 1.4 ha, much lower than the upper size-class limit of 2 ha. Given their economically unviable holding size, and small quantities of marketable surplus, there will be a marginal increase in the total net income of these farmers from agriculture even if they are given the higher MSP of over and above 50% of crops of production.

The relative economic conditions of the agricultural workforce (cultivators as well as labourers) have gone poorer vis-à-vis their counterparts in the non-agricultural sectors. Taking into account a large number of underemployed and those disguised unemployed workers in agriculture, MSP alone is not going to address the agrarian crisis and farmers’ distress, especially in the case of marginal and small AHHs, who account for 87% of AHHs.

If not MSP? Then where lies the problem?

Looking Beyond the MSP

The long-term fundamental solutions that has the potential to solve the agrarian crisis in India lies in the domain of.

An Alternative to MSP: Price Deficiency Payment System

The increase in the MSP irrespective of cost consideration is a second-best alternative to make farming viable. Moreover, to make MSPs effective to the country’s present situation requires changes in the criterion used by the CACP to arrive at MSPs.

The CACP mainly considers the cost of production as the main criterion to decide the level of MSPs. This is justified when there is a situation of scarcity and increasing the food supply is the primary objective. However, the country is now facing a situation where the demand is falling short of supply, and there is an increase in surplus. In the present context, it is highly recommended that the demand side factors should get primacy in determining the MSP.

There are several other problems related to cost of production used as a basis for MSPs. Wastefulness gets in-built into production process, and farmers do not have to bother if growing a particular crop on land unsuitable for its cultivation would raise cost of production

Second, fixing MSPs based on the cost of production totally neglects changes in income and society’s preference for a commodity which adversely impacts the functioning of the markets and price discovery. It also causes serious imbalances in what is being produced and what is required or demanded.

Rather than debating on the cost criterion, it is much important to ensure that the farmers do not undertake distress sale of their produce. This would require some mechanism on the ground to see that farmers are not forced to sell their produce below the MSP.

However, there exists no such mechanism on the ground except for few crops like rice and wheat in some states and in the case of sugarcane and cotton in states of Maharashtra and UP. Unfortunately, nobody seems to have raised this issue in public that implementation of the MSP is more important.

The Swaminathan Commission

The National Commission on Farmer’s headed by Dr M S Swaminathan highlighted that the main reasons of agrarian agony in India were non implementation of land reforms, water scarcity, lack of irrigation, technology exhaustion, inadequate access and availability of institutional source of finance, dependence on money lenders, weak market infrastructure, lack of opportunities for assured and remunerative marketing, low investment in research and development, low levels of education and skill, and lack of employability of surplus workforce outside agriculture.

The Swaminathan commission had recommended serval path-breaking measure to resolve agrarian distress in India. These recommendations are of a more vital nature and in all likelihood will provide a long-term solution to the agrarian crisis and farmers’ distress. The National Commission on Farmer’s recommendations are mainly in the domain of land reforms, irrigation, productivity, credit, insurance, food security, bio-resources, and public investment in agriculture, human development, and the rural nonfarm sector. The Swaminathan commission has thus provided solutions to the agrarian crisis and farmers’ distress both in the domain of the agriculture sector as well as outside agriculture sector.

The Alternative

The alternative is to go for ‘deficiency price payment’ without requiring the government to purchase undesirable quantities and undesirable commodities. Deficiency price payment must be part of the difference between the actual price received by farmers and the MSP. In order to ensure that resale of produce does not take place the size of deficiency payment should be kept less than the charges involved in the first sale of produce like mandi fee, auction, labour charges, etc.

The Madhya Pradesh government has launched a ‘Price Deficiency Payment’ schemes for the farmers called ‘Bhavantar Bhugtan Yojana’ (BBY) in October 2017. The BBY currently applies eight Kharif crops; soybean, maize, urad, tur, lentil, moong, groundnut, ramtil. Under BBY, the state government credits the difference between MSP and the modal price (average price prevailing in the market) directly into the bank accounts of the beneficiaries. The farmers have to first register on a BBY portal, after which they are asked to bring their produce to the mandis at a time specified by the government. The quantity of the produce qualified for the price deficiency payment is determined by the state government on the basis of average productivity and area under cultivation for the crop.

However, the scheme has very limited success, and the scheme is not inclusive as the benefits of the BBY is limited to small number of farmers who registered under the portal. For example, only 32 percent of urad production in Madhya Pradesh got the yojana’s benefit despite the fact that ASP of urad was 42 percent below its MSP. In other words, 68 percent of urad production was sold at prices below MSP, without any compensation under BBY. In the case of soybean, the state’s prime Kharif crop, the percentage of production benefiting from this scheme is even lower — only 18.5 percent, despite its ASP being 12 percent below the MSP. And for maize, groundnut and moong, the coverage is even poorer.  

Moreover, the farmers who are not registered under the portal have to suffer big losses because traders are suppressing the market. To conclude, BBY is not inclusive and covers only 25 percent of the farmer’s losses and is prone to manipulation by the traders.

A similar Price Deficiency scheme is launched by the Government of Haryana for onion, tomatoes, potatoes and cauliflower and the Government of Telangana (on a pilot basis) where the farmers are given investment support for their working capital needs.   

In addition to these expense, there may be further distortions. The Marketed surplus for all the crops is likely to increase since farmers may find it more profitable to sell all the produce in the mandis. The BBY scheme window is likely to be open for only a couple of months and farmers will have to sell their produce within the short time frame to avail compensation. This will eventually led to decline in the market price in that period because of large supply. The scheme will be worse for the unregistered small and marginal farmers because they will be forced to sell their produce at lower prices at a lower price and will not be compensated for their loses. The scheme will give more power to the lower bureaucracy and traders as all the paper work for farmer registration and sale of produce in the mandi will go through them. Therefore, the scheme may end up helping trader more than the needy farmers.  

The government of Telangana ‘Input Support Scheme’ is more inclusive since it does not require farmers to register their areas and crops. The scheme main aim is to save the farmer from the moneylenders by providing them loans for the purchase of the inputs like seeds, fertilizer, machinery and hired labour. Moreover, the farmers are given a choice to produce any crop and sell it anytime in a mandi of his choice. The Telangana model is crop neutral, more reasonable and transparent. The scheme is based on market mechanism as it does not distort the prices of the crops.

In contrast, the Government of Telangana and Government of Karnataka has plan to launch the ‘Input/Income Support Scheme’ on per hectare basis for both the Kharif and Rabi season in 2018-19. The scheme is more inclusive since it does not require farmers to register their areas and crops. The scheme main aim is to save the farmer from the moneylenders by providing them loans for the purchase of the inputs like seeds, fertilizer, machinery and hired labour. Moreover, the farmers are given a choice to produce any crop and sell it anytime in a mandi of his choice. The Telangana model is crop neutral, more reasonable and transparent. The scheme is based on market mechanism as it does not distort the prices of the crops. The Telangana government scheme will support investment at Rs 4000 per acre per farmer for the purchase of inputs like seeds; Fertilizer; Pesticides etc. The amount will be directly paid into the bank accounts of the farmers before the beginning of the sowing season. On similar lines, Karnataka Government also plans to implement DBT of Rs 5000 per hectre for dryland farmers in Kharif 2018.

Pricing policy for sugarcane

The pricing of sugarcane is governed by the statutory provisions of the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act (ECA), 1955. Prior to 2009-10 sugar season, the Central Government was fixing the Statutory Minimum Price (SMP) of sugarcane and farmers were entitled to share profits of a sugar mill on 50:50 basis. As this sharing of profits remained virtually unimplemented, the Sugarcane (Control) Order, 1966 was amended in October 2009 and the concept of SMP was replaced by the Fair and Remunerative Price (FRP) of sugarcane. A new clause ‘reasonable margins for growers of sugarcane on account of risk and profits’ was inserted as an additional factor for working out FRP, and this was made effective from the 2009-10 sugar season.

Accordingly, the CACP is required to pay due regard to the statutory factors listed in the Control Order, which are

• the cost of production of sugarcane;
• the return to the grower from alternative crops and the general trend of prices of agricultural commodities;
• the availability of sugar to the consumers at a fair price;
• the price of sugar;
• the recovery rate of sugar from sugarcane;
• the realization made from the sale of by-products viz. molasses, bagasse and press mud or their imputed value (inserted in December 2008) and;
• Reasonable margins for growers of sugarcane on account of risk and profits (inserted in October 2009).

States also announce a price called the State Advisory Price (SAP), which is usually higher than the SMP.

Other Major Support Schemes of Government

Market Intervention Scheme

Similar to MSP, there is a Market Intervention Scheme (MIS), which is implemented at the request of State Governments for procurement of perishable and horticultural commodities in the event of fall in market prices.

The Scheme is implemented when there is at least 10% increase in production or 10% decrease in the ruling rates over the previous normal year. Proposal of MIS is approved on the specific request of State/UT Government, if the State/UT Government is ready to bear 50% loss (25% in case of North-Eastern States), if any, incurred on its implementation.

Under MIS, funds are not allocated to the States. Instead, the central government share of losses as per the guidelines of MIS is released to the State Governments/UTs, for which MIS has been approved based on specific proposals received from them.

Price Supports Scheme (PSS)

The Department of Agriculture and Cooperation implements the PSS for procurement of oilseeds, pulses and cotton, through NAFED which is the Central nodal agency, at the Minimum Support Price (MSP) declared by the government.

NAFED undertakes procurement as and when prices fall below the MSP.

Procurement under PSS is continued till prices stabilize at or above the MSP. Losses, if any incurred by NAFED in undertaking MSP operations are reimbursed by the central Government. Profit, if any, earned in undertaking MSP operations is credited to the central government.

BUFFER STOCK

Buffer Stock is another main instrument of Agriculture pricing policy in India. India has a policy of maintaining a minimum reserve of foodgrains (only for wheat and rice) so that food is available throughout the country at affordable prices round the year.

The main supply from the government’s buffer stock goes to the public distribution system (now TPDS) and at times goes to the open market to check the rising prices if needed.

Public sector food grain stocks are significant support of India’s food policy and food security. They have three important societal goals.

1. To provide space for effective implementation of minimum support price for rice and wheat through procurement mechanism.
2. To maintain price stability arising out of year to year fluctuations in output or any other exigency.
3. As a source of supply for public distribution system and various other schemes to sustain food and nutrition security particularly of economically weaker sections.

The Food Corporation of India is the key agency for procurement, storage and distribution of food grains. In addition to the requirements of wheat and rice under the targeted public distribution system, the Central Pool is essential to have sufficient stocks of these in order to meet any emergencies such as drought/failures of the crop, as well as to allow open market intervention if price increases.

Major objectives of Buffer Stocks:

However, the Buffer Stock policy has raised the questions over the storage capability of the FCI and contaminated grains in the open godowns in the country. The issue of storage had also been highlighted by the Supreme Court, which recommended that government should allocate the grains free to the poor section of society. The problem is huge, but the government does not have an immediate solution. The FCI has to increase the storage capacity to accommodate the record procurement.

Current Buffer Stock Policy of Government:

1. The current buffer norms were reviewed in January 2015. According to the new norms, the central pool should have 41.1 million tonnes of rice and wheat on July 1 and 30.7 million tonnes on October 1 every year. These limits were 32 million tonnes and 21 million tonnes earlier.
2. The stocking norms for the quarters beginning January’1 and April’1 have been revised only slightly. Main drivers for increased buffer stocks were increased offtake from the targeted public distribution system and also the enactment of National Food Security Act.
3. It was observed that Food Corporation of India buys almost one-third of the total rice and wheat produced in the country at minimum support prices. It does imply that denying to any farmer who wants to sell his produce at MSP. But then it also needs to maintain an excessive, uncontrollable and monetarily troublesome food inventory.
4. Previously, once the buffer norms were met, cabinet approval was needed to sell any part of it in the open market. But in January 2015, it is revised.
5. The current policy is that Food Ministry is authorized to dispose the surplus stock into open market without seeking cabinet approval. This was a major policy decision, and it was needed to resolve the problem of burdensome inventories at Food Corporation of India and misrepresentation created in the market.
6. The maintenance of a buffer stock is also important to ensure national food security. Stocks mainly of rice and wheat are commonly maintained from year to year at a substantial cost in order to effectively take care of variations in domestic food grain production. These variations occur quite regularly due to climate and man-made factors.
7. Buffer stocks are created from the domestic food surpluses available in years of high production. They are also built and maintained through imports as and when required. The optimum size of the buffer stocks at any point of time is based on the proposals of expert committees appointed for the purpose by the government from time to time.

In the context of India, buffer stocking of food grains is theoretically seen as a mechanism to deliver strategic food and agricultural domestic support policies, but in terms of its effectiveness to accomplish its objective, there is a growing consent, both domestically and internationally, that the food stocking programme has been not just expensive but also indiscreetly wasteful.

In India, the prices of agricultural products such as wheat, cotton, cocoa, tea and coffee tend to alter more than prices of manufactured products and services. This is mainly due to the volatility in the market supply of agricultural products coupled with the fact that demand and supply are price inelastic.

In order to manage the fluctuations in prices, it needs to operate price support schemes through the use of buffer stocks. Buffer stock schemes stabilize the market price of agricultural products by buying up supplies of the product when harvests are copious and selling stocks of the product onto the market when supplies are low.

Problems with buffer stock schemes:

• Theoretically, buffer stock schemes should be lucrative, since they buy up stocks of the product when the price is low and sell them onto the market when the price is high. Nonetheless, they do not often work well in practice. Evidently, perishable items cannot be stored for a long time and can, therefore, be immediately ruled out of buffer stock schemes.
• Cost of buying excess supply can cause a buffer stock scheme to run out of cash. A guaranteed minimum price causes over-production of rice and wheat which has its economic and environmental costs.
• There are also high administrative and storage costs to be considered.
• Open-ended Procurement policy leads to excess procurement and since FCI storage capacity of grains is limited a large amount of grain procured under buffer stock scheme is wasted and rotten.