To deal with increasing uncertainties due to unpredictable weather changes and increased marketing risks and wild swings in both input and farm produce prices that lower return on investments, farmers have been demanding a legal guarantee to MSP for all 23 crops for a long time. The latest round of the protest is no different.
In an attempt to pacify agitating farmers on the eve of the next general election, the Modi government has proposed a new scheme. This scheme aims to provide farmers with a guaranteed minimum support price (based on A2+FL+50 percent) for five years, covering five crops: paddy, wheat, pulses, maize, and cotton. The government says that this scheme will ensure income certainty for farmers and encourage crop diversification.
However, the farm lobbies led by the likes of Samyukta Kisan Morcha (SKM) have out-rightly rejected the government’s proposal and argues that it aims to dilute the demand of MSP based on C2+50 percent for all crops which was promised in the BJP’s Election 2014 Manifesto and originally recommended by M S Swaminathan Commission in 2006. SKM has hinted that nothing short of MSP@C2+50 percent for all crops with guaranteed procurement will be acceptable to farmers.
It appears that the Modi government’s big retreat on farm reform legislations in 2020 has emboldened the country’s farm lobbies, explaining their rigid stance. If accepted, this could block pro-market agricultural reforms in future and potentially be fiscally ruinous.
MSP’s Role In Price Signalling
The fundamental idea behind establishing minimum support prices is to ensure that growers receive a guaranteed minimum price for their produce, providing income certainty for farmers in a country where nearly half of the gross cropped land area depends on unpredictable monsoon rains for irrigation.
The announcement of MSPs also assists farmers in deciding which crops to cultivate and in what proportion on their land. This becomes especially crucial in a scenario where farmers lack access to reliable demand forecasting. Thus, the MSP system, in theory, facilitates production planning, offering a semblance of stability in an otherwise volatile agricultural landscape.
However, the practical application of MSPs presents a different picture. While the system appears effective for major crops like rice and wheat, where the government buys significant quantities of output to influence market prices, its efficacy diminishes for other crops. In the case of cane, sugar mills are compelled by the government to purchase all supplied cane at prices fixed by central or state governments, with no connection to sugar prices, the finished product. This has adversely affected India’s sugar industry, leading to frequent demands for subsidies and bailouts.
Contrary to the widespread belief that farmers base their cropping decisions on MSPs announced before the start of sowing operations, they tend to rely more on last season's prices. These historical prices provide much-needed price signals for the average Indian farmer, shaping their decisions for the upcoming sowing season.
Limitations Of Government Procurement Mechanism
Despite widespread support for fixing floor prices for all major crops, the current MSP system's effectiveness is limited. Minimum support prices for many crops are indicative in nature due to a lack of an effective procurement mechanism. The demand for legal backing to MSPs for all crops, while rooted in the noble idea of ensuring farmer income, may not align with the practical realities of agricultural operations.
Creating and maintaining procurement infrastructure for an additional 20 crops would require substantial financial investment. Moreover, the bureaucratic capacity to execute large-scale procurement operations across the vast expanse of India, especially for perishable crops, is not guaranteed. if past experience with rice and wheat procurement is any indication.
There are adverse side effects of the current mechanism that shouldn’t be ignored, for instance, mounting losses and debt pileup of Food Corporation of India (the government’s procurement agency) due to under recoveries, wastage and corruption.
Considering the composition of Indian agriculture, where 86 percent of farmers are small and marginal, owning less than 2 hectares of land, an open-ended procurement system funded by taxpayers raises economic and social concerns. It aids food inflation. Besides, such a system tends to be monopolised by wealthier farmers in specific states, such as Punjab, Haryana, Madhya Pradesh, and Uttar Pradesh for wheat, and Punjab, Haryana, and Telangana for rice. Shanta Kumar committee (2015) has found out that only six percent of the Indian farmers, mostly those with large landholdings, have benefitted from MSP and assured government procurement.
This is also the segment which appropriates most of the benefits of subsidised inputs such as irrigation water and chemical fertilisers, or farm loans, and yet don’t pay any income taxes. The skewed distribution of benefits raises questions about the economic sustainability and social justice of such a procurement model. Additionally, the concentration of subsidies among wealthier farmers perpetuates inequality within the agricultural sector.
The current system of assured procurement and fixed prices, oblivious to changing consumer demand, inadvertently encourages the cultivation of water-intensive crops in water-deficient regions. A glaring example is the cultivation of paddy (rice) in Punjab or sugar cane in water-starved regions of Maharashtra. No wonder, the share of paddy in Punjab’s total cultivated area has steadily gone up from 5 percent in 1960 to 40 percent in 2020, while that of pulses has declined from 19.1 percent to 0.5 percent in this period.
The Way Forward
To conclude, while farmer welfare is undeniably crucial, a legally backed, fiscally ruinous MSP for all crops may not be the optimal solution. A nuanced strategy, informed by global experiences and focused on efficiency and innovation, is essential for sustainable agricultural growth in India.
Balancing the needs of farmers with economic realities requires exploring alternatives like a crop-neutral income support programme, measures to boost farm productivity and a well-developed futures market. The path forward lies in finding a middle ground that safeguards farmers without compromising the long-term viability of Indian agriculture.
Prerna Sharma Singh is a director on the board of Indonomics Consulting Private Limited, a policy research and advisory startup, and heads its agriculture, food and retail practice. She tweets at @AgriFoodRetail. Views are personal, and do not represent the stand of this publication.
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