Context

There has been debate on the issue of MSP with some arguing against it while some favouring it.

The issues with MSP

• The broad strands of argument against MSP are:
• MSP hinders the price discovery: Providing MSP does not allow the market to discover the prices; if market cleared prices are less than MSP, then the only buyer would be the government; this would render the government bankrupt.
• FPO as a mechanism to deal with markets: If markets have any distortions, the way to negotiate it is through Farmer Producer Organisations (FPOs) — as demonstrated by Amul.
• Provide income support through DBT: A better way to address the possible income gap is to give an income support-based direct benefit transfer (DBT).

Why MSP is necessary?

1] Barriers in agri-markets

• Through tariffs and other measures, we have built a national barrier on markets, where gates are opened on the basis of strategic intent.
• If we were to open our borders for free movement of grains from elsewhere, we may even argue for unlocking agricultural land for more lucrative purposes without worrying about food self-sufficiency, buffer stocking and domestic food safety.
• We may have to accept a national food safety for at least the essential foodgrains and pulses.

2] Role of MSP as price signalling and why it needs to be given as legal guarantee

• Disproportionate risk: If we were to look at farming, we realise that this exposes itself to disproportionate risks. 
•  First, there is no stop-loss mechanism after sowing the seed, except for destroying the crop for the season.
• This enterprise not only has the usual business risks but also has the enhanced risk of the force majeure elements that destroy the enterprise — a sudden hail storm, drought, unseasonal showers, a pest attack, a locust attack — there are too many things that the farmer cannot control.
• Therefore, an MSP provides a powerful signal to the farmer to exercise the choice of sowing a particular crop because the farmer can back-calculate the expected margin.
•  If MSP is a signal that helps the farmer to choose a crop, then it must remain a choice at the harvest time as well.
• The significance of MSP is only when the markets do not clear the price.
• In such a situation, the farmer gets a return less than the MSP and by this argument we are escorting the farm fraternity towards bankruptcy.
• A legal guarantee is, therefore, needed.
• The argument that the state will have to procure all the floating stock in the market and may become bankrupt is fallacious.
• The intervention of the state in the markets usually covers information asymmetry, arbitrage and cools the markets when they get overheated.

3] Why not opt for income support instead of MSP?

•  Income support does not address the issue of viability of the farming operations.
• There is no doubt that we need to make farming viable.
•  It is important to address the prices of each crop as a strategic signalling mechanism: For crops that would be encouraged and those that would be discouraged.

4] Issues with drawing parallels with AMUL

•  While the Amul model recognised the inherent power of markets, it took about five decades to make the system competitive — the investments were made in breed improvement, free veterinary services, better cattle feed, capital subsidy for processing plants, and return-free capital as investments.
• The nature of subsidies was smart and innovative.
• Dairying was the last bit to be liberalised, and it enjoyed protection even when we opened up in 1991.

Way forward

• Modernise the markets: We need to modernise the markets and storage and processing facilities.
• There is no point in conflating modernisation with liberalisation.
• Investment: If we need to take Indian agriculture on the path of Amul, we need to start making those investments now.

Consider the question “What are the objectives of providing MSP? How legal basis to MSP could help in making agriculture viable in India?”

Conclusion

Let us use the MSP framework smartly on diversified crops, on a decentralised basis while we develop the markets. A legal guarantee will only assure the farmers that they will not be bankrupted.

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