Context

Many political parties are demanding to make the minimum support prices (MSP) a legal instrument.

Background of MSP

• MSP regime had its genesis in 1965 when India was hugely short of basic staples and living in a “ship-to-mouth” situation.
• Indicative price: It was an indicative price (not a legal price) and procurement of rice and wheat was done to support farmers when they were adopting new seeds (HYV technology) and domestic procurement was to feed the PDS.
• The government declares MSP for 23 crops: Seven cereals (paddy, wheat, maize, bajra, sorghum, ragi and barley), five pulses (tur, moong, chana, urad and masur), seven oilseeds (soybean, groundnut, rapeseed-mustard, sesamum, safflower, sunflower and nigerseed) and four commercial crops (sugarcane, cotton, jute and copra).

Need to rethink procurement policy

• But now with granaries overflowing with rice and wheat, there is a need to rethink and redesign the procurement policy.
• In the crop year 2020-21, about 60 million metric tonnes (MMTs) of rice and 43 MMTs of wheat were procured by the Food Corporation of India (FCI) and NAFED procured about 0.66 MMTs of pulses.

The increasing cost of PDS

• The main procurement by the government happens largely for rice and wheat to feed the public distribution system (PDS).
• The PDS issue prices of rice and wheat are subsidised by more than 90 per cent of their economic cost to the government.
• In 2020-21, the food subsidy bill was almost 30 per cent of the net tax revenue of the central government, reflecting clearly a huge consumer-bias in the system.
• Way forward: Unless this PDS is reformed either by restricting this to say the bottom 30 per cent of the population, or raising the issue prices to say half the economic cost of rice and wheat, giving a better deal to farmers is likely to blow up the fiscal position of the central government.

The cost of legal MSP

• Assuming that only 10 per cent of the production of remaining crops (excluding sugarcane) is procured, it will cost the government about Rs 5.4 lakh crore annually to procure these other MSP crops.
• This cost is estimated on the basis of economic costs of operation that are usually about 30 per cent higher than the MSP (in case of rice and wheat it is 40 per cent).
• But it appears that despite this, market prices may stay below MSP, especially during the harvest time.
• It also raises the question why only these MSP crops, why not other agri-produce, say milk, the value of which is more than the value of rice, wheat and sugarcane combined.

Way forward

• PDP: One may use price deficiency payments (PDP), implying that the government pays to farmers the gap between the market price and MSP, whenever market prices are below MSP.
• Income support instead of price support: It may be better to use an income policy on a per hectare basis to directly transfer money into farmers’ accounts without distorting markets through higher MSPs or PDPs.

Consider the question “What are the challenges in providing the legal backing to the Minimum Support Price to the agriculture produce? Suggest the way forward.”

Conclusion

There is no easy substitute to “getting the markets right”. Government need to apply an innovative approach to solve the conundrum of the MSP.

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