The convention of announcing the Minimum Support Prices (MSP) in India started in 1966 as the Green Revolution gained momentum, enhancing the farmers' productivity, especially in wheat. Adopting modern cultivation practices with high-yielding varieties led to increased grain arrivals at harvest time. It also led to distress sales leading to deteriorating economic conditions of the farmer households. At the same time, banking on the Green Revolution, policymakers intended to push the country toward self-sufficiency in foodgrains, leading to food security. Paddy was another crop whose production was successfully augmented by the price support programmes. By setting MSP for wheat, the government aimed to stabilise its prices and provide a reliable income source for farmers, which would, in turn, encourage them to invest in wheat cultivation and increase production and productivity.
The MSP primarily includes the cost of cultivation estimates collected from across the nation and announced with a margin that provides the policy leeway making it a tool to guide farmers in their sowing decision. This margin includes consideration for the demand and supply situation, market prices, building strategic storage, decreasing import dependencies as in pulses and oilseeds, etc. A 50 percent hike over and above the cost of cultivation was considered across crops to provide farmers with relatively fair returns. This margin remains critical in signalling the farmers and nudging them to bring in more area under cultivation of pulses and oilseeds where supply conditions remain challenged, traditionally.
Addressing Supply Challenges
The MSP announced for the Kharif 2023-24 season, including the last few years, has been a reflection of the policy aspirations to alleviate the prevailing supply and demand conditions (pulses), cut down on import dependency (oilseeds), and enhance nutrition security through minor millets. It reflects moving away from the tradition of using MSP as a tool to nudge farmers to provide the economy with more such crops whose supply and hence prices will remain challenged. If we look at the current MSP revision, it is clear that oilseeds and pulses received higher increases considering current or future possible supply challenges. Prices of minor millets are also getting a better boost this year, in line with the International Year of Millets and their ability to be a source of nutrition for the population.
Moving on from 1966 into 2000, i.e., the year of globalisation, the government liberalised the derivative markets to signal the farmers in sowing and to aid them in making better marketing decisions. However, the same markets liberalised as part of the farming sector empowerment initiative had witnessed less interest from the participants due to a lack of consistent policy on trading agricultural commodity derivatives. It was also impacted as there were other laws, such as the Essential Commodities Act, limiting the storage of essential commodities and the potential supply and demand information to help them make better market participation decisions. The frequent stalling of trading in agricultural commodity derivative contracts has implications for the future of agriculture and hence nurturing markets as a tool to contribute to the betterment of farmers’ income.
Diminished Derivatives Market
The role of the derivative markets seemed to have been taken over by the MSP mechanism in the last few years without recourse to those farmers who are caught between the reality of the mandis and the aspirations of the policy as it remains a guiding signal, not the procurement assurance. Farmers continue to be exploited by traders as in the past despite the sincere intentions of policymakers to provide fair remuneration to farmers. On the other hand, a price offered by a vibrant derivative market would be backed by delivery and payment assurance to the farmers, with access to the markets. For those with no access to delivery in the derivative markets, it empowers them with price information to negotiate a better price with traders. Besides, vibrant derivative markets for a commodity closely align all the physical markets around the prices it discovers.
Given that supply of critical pulses in the markets is the current concern, it reflects the same contention that a mere MSP will not help the farmers but would have to be backed by a robust procurement network. In the absence of the same, farmers’ sowing decisions would be guided by the previous year’s price information that could activate the operation of the Cobb-Webb phenomenon in the market ecosystem. On the other hand, hoarders have always been at the receiving end at times of supply crises. While some storage may be genuine, due to the lack of information about stored produce and its ownership, we still operate with the same limits on storage as a tool rather than making storage information transparently available by mandating the Warehousing Development and Regulatory Authority (WDRA) accreditation and capturing and transmitting storage data, leveraging the commodity repository mechanism. The widespread availability of WDRA-accredited storage will also provide improved connectivity to finance and better transparency for market policy decision-making and price discovery in markets.
The MSP shall be an effective policy tool only if backed with assured procurement. However, assured procurement of all available crop produce will not only be a fiscal burden but also calls for greater responsibility of the government in effective and safe disposal. Alternatively, a vibrant agricultural commodity futures market backed with a scientific storage mechanism that provides real-time storage data will aid in efficient resource allocation amongst competing crops while providing farmers with fair remuneration.
V Shunmugam is Adjunct Faculty with National Institute of Securities Markets. Views are personal, and do not represent the stand of this publication.
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