Why in the News?

There is an ongoing heated discussion about whether farmers should be given a legal guarantee for Minimum Support Price (MSP).

Is a legal guarantee for MSP feasible within India’s economic framework?The arguments in favour of the legalisation of MSP:

Protects Farmers from Market Fluctuations: Farmers often face volatile market prices due to surplus production, inadequate infrastructure, or global competition. A legal guarantee for MSP ensures a minimum income and shields them from sudden price crashes.
Example: Crops like onions and tomatoes frequently see price collapses that leave farmers unable to cover costs.
Addresses Rural Distress and Ensures Livelihood Security: A guaranteed MSP provides a reliable source of income, reducing poverty and addressing the rural distress that drives issues like farmer suicides.
Example: In drought-prone regions, assured MSP acts as a safety net against the dual impacts of climate change and market failures.
Supports National Food Security: Incentivizing farmers through a guaranteed MSP ensures the continued production of essential crops, securing food for the nation and stabilizing food prices for consumers.
Example: Government procurement of rice and wheat at MSP forms the backbone of the Public Distribution System (PDS), ensuring affordable food for millions.

Risk of Market Distortions: A legally enforced MSP could disrupt natural price discovery, discouraging private investment in agriculture and creating inefficiencies in the market. Example: Guaranteed MSP could encourage overproduction of certain crops, leading to supply gluts and environmental degradation.
Unsustainable Fiscal Burden: Implementing MSP for a wide range of crops would require massive public expenditure, diverting resources from other developmental priorities like healthcare and education.

Widening Food Basket: Expanding the food basket in the Public Distribution System (PDS) and increasing procurement levels at MSP can help ensure farmers receive fair prices without direct purchases.
Market Intervention Schemes: Establishing targeted market intervention schemes can prevent prices from falling below the MSP, thus providing farmers with necessary price support.
Price Deficit Payment (PDP): A legally mandated compensation mechanism for farmers when market prices fall below the MSP could be implemented. This would not require direct procurement but would ensure farmers are compensated based on official data regarding area sown and average productivity.

Social Contract: The demand for a legally guaranteed MSP reflects an unwritten social contract between the Indian state and farmers. Breaching this contract could lead to further disenfranchisement of farmers facing challenges like climate change and global competition.
Market Dynamics: A legal guarantee could alter market dynamics by ensuring that farmers are not solely dependent on volatile market conditions. This might encourage more stable agricultural production and investment in rural areas.
Political Considerations: Given the electoral implications of food prices in a democracy, a legally guaranteed MSP could compel governments to prioritise farmer welfare over consumer price suppression, potentially leading to more balanced agricultural policies.

Strengthen Decentralized Procurement and PDP Mechanisms: Expand the food basket under PDS and introduce Price Deficit Payment (PDP) schemes to ensure farmers receive MSP without burdening government finances through direct procurement. This would also reduce inefficiencies in distribution.
Promote Diversification and Agri-Infrastructure: Encourage crop diversification by linking MSP with environmentally sustainable and high-value crops, supported by improved storage, transportation, and market access to minimize post-harvest losses and enhance farmer incomes sustainably.

Q What do you mean by Minimum Support Price (MSP)? How will MSP rescue the farmers from the low-income trap? (UPSC IAS/2018)