Why this Debate?
In June 2023, the Cabinet committee on Economic Affairs granted approval for a rise in the minimum support prices (MSP) for Kharif crops. Subsequently, several prominent ministries and departments of the Central government expressed concerns to the Union Ministry of Agriculture and Farmers’ Welfare on their proposition to increase the minimum support price (MSP) for kharif crops during the 2023-24 season. The present inquiry pertains to the viability of augmenting the Minimum Support Price (MSP) as a prospective solution for farmers, or alternatively, if it would be advisable to confer legal entitlements to farmers on MSP. In recent years, farmers have been advocating the establishment of a legally binding assurance on the Minimum Support Price (MSP) for their agricultural produce, which would be determined in accordance with the formula recommended by the Swaminathan Commission. Is it advisable to legalise the Minimum Support Price (MSP)? Prior to delving into the advantages and disadvantages, it is imperative to first get a comprehensive understanding of the concept of MSP.
What is Minimum Support Price (MSP)?
Throughout the year, farmers in India engage in the cultivation of several agricultural commodities, including paddy (rice) during the kharif season, characterised by sowing in June and harvesting in November, as well as wheat during the rabi season, characterised by sowing in November and harvesting in March. Typically, agricultural producers predominantly engage in the sale of their crops within the marketplace. The concept of Minimum Support Price (MSPs) was first proposed throughout the 1960s. The government declares minimum support prices for a total of 23 crops throughout each farming season. The Minimum Support Price (MSP) for a commodity refers to the price at which the government is obligated to purchase the produce from farmers in the event that the market price falls below this threshold. Consequently, Minimum Support Prices (MSPs) serve as a baseline for market prices, guaranteeing that farmers obtain a specific minimum compensation to cover their cultivation expenses and potentially generate some profit. The Minimum Support Price (MSPs) fulfil an additional policy objective. By utilising these measures, the government provides incentives for the cultivation of specific crops, thus assuring the maintenance of an adequate supply of essential food grains in India.
In general, Minimum Support Prices (MSPs) have a significant influence on determining the price standards for agricultural products, extending beyond the specific commodities for which they are officially declared. The announcement of Minimum Support Prices (MSPs) is determined by the Union government, hence signifying that it is a decision made by the government. However, the government mostly relies on the recommendations put out by the Commission for Agricultural Costs and Prices (CACP) when making its decisions.
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 per cent as the margin over the cost of production; and— The likely implications of an MSP on consumers of that product.
The minimum support price (MSP) is determined by the Central Government through a formula that takes into account production costs and sets the price at one-and-a-half times these expenses. This analysis considers both explicit costs (A2), which include expenses for items such as seeds, fertilisers, pesticides, fuel, irrigation, hired labour, and leased-in land, as well as the estimated value of unpaid labour provided by family members (FL). The farm unions are advocating the inclusion of capital assets, rentals, and forgone interest on owned land in the comprehensive cost calculation (C2), as per the recommendation put forth by the National Commission for Farmers. Based on the findings of the Shanta Kumar Committee’s report in 2015, it was revealed that a mere 6% of agricultural households engage in the practise of selling wheat and rice to the government at Minimum Support Price (MSP) rates. Nevertheless, the procurement in question has experienced a notable increase in recent years, so perhaps contributing to the enhancement of the minimum price for private transactions.
It has been alleged by many economists and agricultural experts that the government’s procurement of agricultural produce at minimum support prices (MSPs) is not comprehensive. The procurement process at the Minimum Support Price (MSP) is subject to variations based on the specific crop and geographical location. Moreover, Minimum Support Prices (MSPs) lack legal underpinning, meaning that farmers do not possess the legal entitlement to claim MSPs as a matter of right. The farmer unions, who spearheaded the prolonged protest resulting in the subsequent repeal of the three farm laws, are urging the government to pass legislation that would grant required status to the Minimum Support Price (MSP), as opposed to its current position as an indicative or desirable price.
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Argument 1: Why Minimum Support Prices (MSP) needs to be a legal right?
Based on the available data, it can be observed that approximately 50 percent of the nation’s populace relies on agriculture and its associated activities for their sustenance. It is the most significant contributor to both employment opportunities and sustenance. Based on a report published by NABARD in 2019, it was found that the typical financial debt burden faced by a farmer’s household exceeds Rs 1 lakh. Notwithstanding the fact that the central and state governments have allocated a subsidy amounting to Rs 3.36 lakh crore to farmers. Farmers are experiencing adverse impacts from both natural disasters and market forces. The phenomenon of climate change is contributing to the heightened intricacy of agricultural practises. The farmer should not be subjected to the unpredictable influences of weather conditions and market dynamics.
Bhupinder Singh Hooda, the former chief minister of Haryana, asserts that there is a need for a transformative shift in the agricultural strategy. First, it is imperative to acknowledge that the farmer should not be perceived merely as a conduit or mechanism for augmenting agricultural output, but rather as a sentient individual who aspires to partake in the conveniences afforded by contemporary society. Furthermore, it is imperative to acknowledge that this right is inherently basic to him. Hence, it is imperative that the agricultural policy of our nation not only prioritises output, but also places a significant emphasis on the welfare and needs of farmers. The responsibility of ensuring affordable grain prices to safeguard consumer welfare cannot be exclusively placed upon the farmer. Frequently, despite farmers offering their produce at reduced prices, buyers nevertheless purchase it at inflated rates. As an illustration, tomato growers recently receive an approximate remuneration of Rs 4 to Rs 5 per kilogramme, whereas the end consumer purchases tomatoes at a price range of Rs 100 to Rs 120 per kilogramme. Farmers are currently facing challenges in obtaining prices that adequately compensate them for their agricultural produce. The presence of intermediaries necessitates the implementation of regulatory measures.
The Bharatiya Kisan Union (Ekta-Ugrahan), a prominent farmer union in Punjab and a constituent of the Samyukta Kisan Morcha (SKM), a collective organisation representing approximately 500 farmer groups, has expressed dissatisfaction with the hike in Minimum Support Price (MSP). The union argues that the government’s objective of guaranteeing 1.5 times the production cost of crops fails to effectively alleviate the challenges faced by farmers, as it does not offer a profitable price for their produce. According to Sukhdev Singh Korikalan, the leader of the group, the current situation may be described as a mere facade, lacking substance. He further asserts that the Minimum Support Price (MSP) should adhere to the Swaminathan Commission’s recommended formula, which suggests a calculation based on C2+50%. Furthermore, it is imperative for the government to establish the Minimum Support Price (MSP) as a legally mandated entitlement for farmers. He further emphasises the necessity for farmers to have a guarantee that their products will be procured at the Minimum Support Price (MSP) in order to sustain themselves in the economically-challenging agricultural industry.
Dr. Ranjit Singh Ghuman, a prominent economist, highlights that historical data indicates a limited number of commodities, mostly wheat, paddy, cotton, and occasionally some pulses, have been acquired at the Minimum Support Price (MSP). Conversely, the majority of other crops have been procured at far lower prices than the MSP. This phenomenon primarily occurs due to the farmers being subject to the influence of market forces and private entities. The lack of implementation of Minimum Support Price (MSP) and the acquisition of crops below MSP have posed significant challenges to the promotion of crop diversity in Indian agriculture and the preservation of the environment. One of the primary issues expressed by farmers is the ineffective execution of the Minimum Support Price (MSP) policy and the failure to acquire all crops at the MSP. This particular scenario presents a compelling argument for granting “legal status” to the Minimum Support Price (MSP) as it serves as the baseline or benchmark price.
According to experts, the increase in food prices can potentially benefit both farmers with surplus production and farmers experiencing a net food deficit, provided that the latter group is safeguarded through the implementation of an efficient food subsidy programme. The farmers would engage in the practise of selling their produce at comparatively elevated prices while procuring it at lower rates from the Public Distribution System (PDS) establishments. An elevated minimum support price (MSP) has the potential to enhance the remuneration of agricultural workers, rendering them beneficiaries as well, provided they are shielded from the effects of food inflation. The augmentation of purchasing power has the potential to enhance the economic conditions in rural areas. Nevertheless, in the context of declining agricultural growth and evident rural misery, increasing the Minimum Support Price (MSP) stands as the sole mechanism for injecting financial resources into the rural sector.
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Argument 2: Why Minimum Support Price (MSP) cannot be a legal right?
According to a policy paper authored by Ramesh Chand, an agricultural economist at NITI Aayog, frequently referenced by officials from the Agriculture Ministry, it is contended that both economic theory and empirical evidence suggest that a price level without support from demand and supply cannot be upheld by legal mechanisms. It suggests that the individual states possess the freedom to establish Minimum Support Price (MSP) rates if they so desire. However, it also presents many instances where such a policy has proven unsuccessful.
According to GV Ramanjaneyulu, the executive director of the Centre for Sustainable Agriculture, the implementation of a guaranteed Minimum Support Price (MSP) policy in India would have detrimental effects on the country’s agricultural sector. Moreover, it is anticipated that this phenomenon will lead to an exacerbation of aberrations in agricultural cropping patterns. The disparity between farming practices in rainfed and desert regions has the potential to exacerbate existing imbalances. He further says that the disparity in natural conditions by noting the conversion of rainfed regions into irrigated areas and the subsequent proliferation of tube wells in these regions. He expressed that by implementing a price guarantee for all products, there is a risk of undervaluing crops with low yields.
According to Ashok Gulati’s article in the Indian Express, the farmers in Punjab and Haryana have historically been the primary beneficiaries of the Minimum Support Price (MSP) system, owing to the lasting impact of the Green Revolution. However, in recent times, the procurement of agricultural produce at MSP has expanded to several other states, with notable examples being Chhattisgarh and Telangana for paddy, and Madhya Pradesh for wheat. This phenomenon has been praised by researchers as a noteworthy accomplishment in the context of Minimum Support Price (MSP) implementation, particularly in Chhattisgarh, a state where over 50 percent of agricultural households and 45 percent of agricultural produce have reportedly derived advantages from MSP. However, when utilising the Census and National Accounts data, the proportion of farmers who receive benefits from the Minimum Support Price (MSP) decreases to 37 percent, and the percentage of agricultural produce that benefits from MSP decreases to a mere 13.7 percent.
Nevertheless, it is important to note that within the narrative surrounding the successful implementation of Minimum Support Price (MSP) programmes among small and marginal farmers in states such as Chhattisgarh, it is crucial to recognise that a significant proportion of these farmers also avail themselves of heavily discounted Public Distribution System (PDS) benefits. There is no process more irrational and economically inefficient than the practise of purchasing paddy from small and marginal subsistence farmers at Minimum Support Price (MSP), only to subsequently return the same rice to them after incurring additional costs amounting to 40% higher than the MSP during the procurement, stocking, and distribution stages.
He further emphasises the importance of providing direct assistance to small and marginalised farmers through the implementation of an income policy or the provision of a diversification package aimed at promoting high-value agriculture. The PM-KISAN policy, which involves the provision of Rs 6,000 directly into the bank accounts of agricultural households, is deemed to be significantly more efficient and beneficial for small-scale and economically disadvantaged farmers. The proposed approach has the potential for refinement and scalability, particularly through its integration with the adoption of ecologically friendly farming practices. For instance, mitigating methane emissions and minimising stubble burning in paddy fields could be complementary strategies to enhance the effectiveness of this approach.
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Argument 3: There are other options than the minimum support price (MSP)
As per the analysis of numerous experts, one approach is the imposition of mandatory Minimum Support Price (MSP) payments upon private traders or processors. This application is already feasible in the cultivation of sugarcane. As per legal regulations, sugar mills are obligated to compensate farmers with the Centre’s designated “fair and remunerative price” for cane. Additionally, certain state governments have established higher recommended prices, commonly referred to as “advised prices.”
The second approach involves the government engaging in procurement at Minimum Support Price (MSP) through its various organisations, including the Food Corporation of India (FCI), National Agricultural Cooperative Marketing Federation of India (Nafed), and Cotton Corporation of India (CCI). In a broad sense, the implementation of Minimum Support Price (MSP) has demonstrated effectiveness primarily in four key crops, namely sugarcane, paddy, wheat, and cotton. In five other crops, namely chana, mustard, groundnut, tur, and moong, the effectiveness of MSP implementation has been somewhat limited. However, in the case of the remaining 14 notified crops, the implementation of MSP has been weak or non-existent. In the domains of livestock and horticultural produce, such as milk, eggs, onions, potatoes, and apples, the concept of Minimum Support Price (MSP) is absent, even in theoretical terms.
The collective contribution of the 23 Minimum Support Price (MSP) crops in India constitutes less than one-third of the whole value of the country’s agricultural output, excluding forestry and fishing activities. One further approach to ensuring minimum support prices (MSP) is through the implementation of price deficit payments. In this context, the government does not engage in the direct procurement or imposition of Minimum Support Price (MSP) on the private sector. In contrast, it facilitates the conduct of sales made by farmers at the currently prevailing market rates. Farmers receive compensation equivalent to the disparity between the government’s Minimum Support Price (MSP) and the average prevailing market price for the specific crop during the period of harvest.
According to Harish Damodaran of the Indian Express, the monetary value of the Minimum Support Price (MSP) for the entire production of the 23 officially recognised crops amounted to approximately Rs 11.9 lakh crore for the fiscal year 2020-21. However, this entire product would not have been successfully sold. The marketed surplus ratio refers to the proportion of agricultural produce that is available for sale after farmers have retained a portion for their own consumption, seed, and animal feed. Estimates indicate that this ratio varies across different crops, with ragi having a surplus ratio below 50%, bajra and jowar ranging from 65-70%, wheat, paddy, and sugarcane falling between 75-85%, most pulses exceeding 90%, and cotton, soybean, sunflower, and jute reaching a surplus ratio of 95-100%. By computing the mean of 75%, a numerical value is obtained, which represents the MSP (Minimum Support Price) value of agricultural products that has been sold by farmers, amounting to little less than Rs 9 lakh crore.
Several experts have proposed a range of alternative measures that the government can consider in lieu of Minimum Support Price (MSP). These measures include providing farmers with remunerative prices for their agricultural produce, allowing market forces to determine prices, and establishing mechanisms to protect farmers from price fluctuations, such as government interventions when commodity prices rise.
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This implies that price determination is predominantly driven by market forces, with government intervention occurring when prices deviate far beyond the standard deviation. Additional agricultural experts concur that the current need lies in establishing effective markets and implementing measures such as price or income support to promote efficient production, as opposed to ensuring a fixed price for every crop.
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