Minimum Support Price (MSP) – Key for UPSC Preparation

Introduction

• Jagjit Singh Dallewal, a leader of the Samyukta Kisan Morcha, has been on a hunger strike for over 40 days, sparking a nationwide conversation about the MSP (Minimum Support Price) guarantee law. 
• This movement, supported by farmers, has called for urgent reforms and a legal guarantee of MSP to protect their livelihoods. 

What is MSP (Minimum Support Price)?

• Minimum Support Price (MSP) is the guaranteed price at which the Indian government commits to purchasing specific crops from farmers when market prices fall below a certain threshold.
•  This system is designed to protect farmers from price volatility and ensures that they get a fair price for their produce, particularly in times of economic stress or crop failure.
• It is important to note that MSPs have no statutory backing i.e. a farmer cannot demand MSP as a matter of right. 
• The MSP is now applicable on 23 farm commodities: 7 cereals (paddy, wheat, maize, bajra, jowar, ragi and barley), 5 pulses (chana, arhar, moong, urad and masur), 7 oilseeds (groundnut, soyabean, rapeseed-mustard, sesamum, sunflower, nigerseed and safflower) and 4 commercial crops (sugarcane, cotton, copra and raw jute).

How is MSP Calculated?

• The calculation of MSP follows a structured process to ensure that the price set reflects the true cost of production and supports the farmer’s livelihood.
• Role of CACP (Commission for Agricultural Costs and Prices): The Commission for Agricultural Costs & Prices (CACP), an attached office of the union agricultural ministry, suggests MSPs for specific crops. While recommending MSPs, the CACP looks at the following factors:
  •  the demand and supply of a commodity;
  •  its cost of production;
  •  the market price trends (both domestic and international);
  •  inter-crop price parity;
  • the terms of trade between agriculture and non-agriculture (that is, the ratio of prices of farm inputs and farm outputs);
  •  a minimum of 50%  as the margin over the cost of production; and
  •  the likely implications of an MSP on consumers of that product.
  • The final decision on MSP levels is made by the Union government’s Cabinet Committee on Economic Affairs (CCEA).
• Approval by CCEA: After receiving the CACP’s recommendations, the Cabinet Committee on Economic Affairs (CCEA), led by the Prime Minister, makes the final decision on MSP. The CCEA considers the national economic situation and the input from state governments before making a formal decision.
• Procurement by FCI: The Food Corporation of India (FCI), along with state agencies, plays a key role in procuring the crops from farmers at MSP rates. This procurement process ensures that farmers can sell their crops at the guaranteed price at the start of the sowing season.

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Different Costs Involved in MSP Calculation

• The MSP is based on various costs to ensure that the farmer receives fair compensation for their efforts. These costs are broken down as follows:
• A2 Cost: This includes all paid-out expenses such as seeds, fertilizers, labor, and fuel used in the production of the crop.
• A2+FL Cost: This is the A2 cost with the addition of the imputed value of unpaid family labor, ensuring that the entire cost of production is covered.
• C2 Cost: This is the most comprehensive calculation, which includes the A2+FL cost, plus land rent and interest on loans. C2 reflects the total economic cost of farming.
• Currently, the MSP is set at 50% more than the A2+FL cost, allowing farmers to earn a reasonable profit.

Why is the MSP Guarantee Law Being Demanded?

• The MSP Guarantee Law has become a central demand for Indian farmers, especially those involved in the ongoing protests. Here are some key arguments in favor of the law:
• Financial Security: A legal MSP guarantee would protect farmers against market fluctuations, providing them with a fixed and stable income despite market price changes.
  • For instance, in 2018, wheat prices dropped to Rs. 1,600 per quintal, which was significantly below the MSP of Rs. 1,735. Such price disparities have left farmers struggling to cover production costs. A legal guarantee of MSP would ensure that farmers are not subject to volatile market conditions. 
• Risk Mitigation: Farmers are often vulnerable to unpredictable weather patterns, pest attacks, and crop diseases. A legally enforced MSP would provide them with financial protection against such risks, ensuring a more secure livelihood.
  • In 2019, for example, unseasonal rains and hailstorms devastated crops in Rajasthan and Madhya Pradesh, causing farmers to face significant financial losses. With an MSP guarantee, such farmers could still receive fair compensation, helping them recover from losses without the added stress of market unpredictability. 
• Promoting Crop Diversification: By guaranteeing MSP, the government would incentivize farmers to diversify crops, encouraging them to grow more sustainable and water-efficient crops like pulses and millets, as opposed to rice and wheat, which are more water-intensive.
  • For example, Punjab, a major producer of wheat and rice, faces a severe water crisis due to the overexploitation of groundwater for rice cultivation. In contrast, crops like pulses and millets require less water, and by guaranteeing MSP for these crops, the government could help incentivize their cultivation, contributing to more sustainable farming practices. The state of Madhya Pradesh has already implemented initiatives such as the Bhavantar Bhugtan Yojna (Price Deficiency Payment Scheme) to encourage diversification, showing that such incentives can have a positive impact on crop patterns. 
• Price Benchmarking: MSP acts as a benchmark, ensuring that market prices do not fall drastically below what the government is willing to pay. This gives farmers leverage to negotiate better prices with private traders.
  • For instance, in 2017, the MSP for paddy was set at Rs. 1,550 per quintal, but the market price in many areas fell below that rate. By legally guaranteeing MSP, farmers would be able to resist market exploitation, ensuring they receive a fair price for their produce. The Farmers’ Union of Maharashtra reported in 2018 that traders were purchasing crops like cotton and groundnuts below MSP in many regions, and a legal guarantee could help curb such practices. 
• Boosting Rural Economies: A guaranteed MSP would lead to higher disposable income for farmers, which would, in turn, boost the rural economy. 
  • For example, the PM-KISAN Scheme, which provides direct income support to farmers, has already shown positive results in boosting rural consumption. According to data from the Ministry of Agriculture and Farmers Welfare, direct transfers under PM-KISAN have contributed to improving rural purchasing power, especially in economically distressed areas. 
  • By guaranteeing MSP, the government could further alleviate rural distress, which has worsened due to challenges such as demonetization and the COVID-19 pandemic.
• A Right for Farmers: According to the Shanta Kumar Committee, only a small percentage (6%) of farmers are able to sell their produce at MSP rates. A legal guarantee would empower farmers, ensuring they have the right to sell at MSP prices when market prices fall short. A recent study by the National Sample Survey Office (NSSO) found that many farmers in rural areas face difficulties accessing government procurement centers, resulting in them being forced to sell at lower, market-driven prices.

Arguments Against the MSP Guarantee Law

• While there is strong support for the MSP Guarantee Law, several concerns have been raised regarding its implementation. Let’s explore the key challenges:
• Food Inflation: Higher procurement costs under MSP guarantees could lead to an increase in food prices. 
  •  For example, the increase in wheat MSP to Rs. 1,975 per quintal in 2020 (from Rs. 1,840 in 2019) led to an uptick in wheat prices across the market. These price increases could especially burden the lower middle class and poor households, who already face challenges with inflation. 
  • The 2019-20 Consumer Price Index (CPI) inflation rate for food items stood at 10.5%, and a further hike in foodgrain prices could contribute to rising living costs, disproportionately affecting lower-income groups.
• Market Distortion: A government MSP guarantee could distort agricultural markets by sidelining private traders. 
  • For instance, Maharashtra’s 2018 order made it illegal for private traders to purchase agricultural produce below MSP, aiming to ensure that farmers were paid a fair price. However, this move faced significant backlash as it led to a situation where the government had to purchase large quantities of crops at MSP, creating financial and logistical challenges.
• Impact on Exports: If MSP is set higher than the international market price, it could reduce the competitiveness of India’s agricultural exports, potentially harming India’s growing export sector.
  • For example, India’s rice export prices are often below the MSP in order to remain competitive in the global market. The MSP for paddy in 2020 was Rs. 1,868 per quintal, but the international price for rice was much lower. If the MSP guarantee system is implemented, and prices are set higher than international rates, Indian agricultural exports could become uncompetitive, impacting the export sector. 
• Fiscal Pressure: The government may face immense fiscal pressure from implementing an MSP Guarantee Law. According to estimates, Rs. 5 trillion would be required to execute the law, which could increase the fiscal deficit and lead to broader economic challenges.
• Risk of Distorted Crop Production: A guaranteed MSP could incentivize farmers to grow crops that are not well-suited for their region but have higher yields. This could lead to the overproduction of certain crops, even in areas where they may not thrive. 
  • For instance, in drought-prone regions such as Marathwada in Maharashtra, there is a risk that farmers might switch to cultivating water-intensive crops like cotton, which is less suited for dry areas. This happened in the case of the 2016-17 cotton season, where farmers in drought-hit areas faced a crisis due to the excessive cultivation of cotton, leading to unsustainable water use and crop failures. In such regions, the focus on crops like pulses, which are more resilient to climate stress, could be undermined by a blanket MSP guarantee, leading to environmental and economic issues in the long run. 
• WTO Compliance Issues: The MSP guarantee could violate WTO principles regarding agricultural subsidies, as the World Trade Organization (WTO) restricts subsidies that distort global trade. India could face opposition from developed countries in WTO disputes, as seen in the US-China case over MSP support. For instance, in 2019, the United States won a case against China at the WTO, arguing that China’s MSP support to its agricultural sector violated WTO norms.
• Expansion to Other Sectors: The MSP Guarantee Law could lead to demands from farmers in allied sectors such as dairy, horticulture, and pisciculture, putting further strain on government resources and complicating the system.
  • For example, in 2020, farmers in the dairy sector began demanding MSP for milk, citing fluctuating milk prices and rising production costs. The demand for MSP could extend to horticultural crops like fruits and vegetables, and sectors like fish farming could also seek MSP to ensure stable incomes. This would put further strain on government resources. 
• Storage and Disposal Challenges: Certain crops, like Niger seed or sesame, may face storage and disposal challenges. Since they are not widely consumed through PDS (Public Distribution System), managing excess stock could become problematic.
  • For example, in 2017, the Maharashtra government faced a crisis with the overproduction of groundnuts, a crop with limited storage and processing infrastructure. The government was unable to procure the entire surplus at MSP, leading to significant losses for farmers. 

Government’s Approach to Supporting Farmers

• Rather than enforcing a legal MSP guarantee, the government has opted for a variety of income support schemes that provide direct assistance to farmers:
• PM-KISAN Samman Nidhi: A direct income support scheme that provides cash transfers to farmers to supplement their income.
• Pradhan Mantri Fasal Bima Yojna (PMFBY): A crop insurance scheme that protects farmers from financial loss due to crop failure.
• Pradhan Mantri Krishi Sinchai Yojana (PMKSY): A scheme aimed at improving irrigation systems to ensure that farmers have access to sufficient water for their crops.
• Agri Infrastructure Fund (AIF): The government has set aside Rs. 100,000 crore for building agriculture infrastructure such as cold storage and processing units, which would help farmers improve post-harvest handling and reduce losses.
• Kisan Credit Cards (KCC): This scheme provides farmers with affordable credit for agricultural activities, ensuring they have the financial means to invest in their farms.

Way Forward

• Price Deficiency Payment Schemes: Instead of guaranteeing full MSP, the government could pay farmers the difference between market prices and MSP, as demonstrated in Madhya Pradesh’s Bhavantar Bhugtan Yojana.
• Market Intervention Schemes: The government could launch schemes to procure perishable items like vegetables to ensure farmers receive a minimum price for their produce.
• Building Agricultural Infrastructure: Investing in modern infrastructure, such as cold storage and processing units, would allow farmers to access better markets and reduce wastage, while also helping them negotiate better prices.
• Supporting Farmer Producer Organizations (FPOs): Strengthening FPOs would allow farmers to collectively market their produce, achieving better price realization. AMUL’s success in the dairy sector offers a model for similar initiatives in agriculture.
• Expanding MSP Coverage: The government could gradually expand the list of crops covered by MSP, promoting crop diversification and reducing the dominance of rice and wheat.