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Insights into Editorial: All about MSP and the demand for a legal backing

 

 

Context:

Union Agriculture Minister has said that the Centre would table the bill to repeal its three contentious farm laws “on the very first day” of the Parliament’s winter session.

This follows the Prime Minister Narendra Modi’s announcement to roll back the agriculture reform laws, against which farmers – mainly from Punjab, Haryana and western Uttar Pradesh – have been protesting in Delhi’s borders for over a year.

Now that the three laws are set to be withdrawn, pressure is mounting on the Modi government to implement the other, no less vociferous, demand by the farm unions: Providing legal guarantee for the minimum support prices (MSP) of crops.

 

What is MSP? Why was it introduced?

MSP is the minimum support price. It was first introduced in the 1965-66 season (July-June) for wheat, and it now covers 23 crops.

It is announced weeks ahead of the Kharif and Rabi sowing seasons. It was introduced to incentivize farmers to grow food crops when India faced a shortage of food grains.

Government agencies such as the Food Corporation of India use the MSP to procure wheat and paddy for the central pool.

In the case of maize, cotton, pulses and oilseeds, the Centre steps in to procure them when their prices rule far below the MSP and farmers resort to distress sale.

 

Why are the unions seeking legal guarantee for MSP?

  1. The Centre currently announces the MSPs of 23 crops. They include 7 cereals (paddy, wheat, maize, bajra, jowar, ragi and barley), 5 pulses (chana, tur/arhar, moong, urad and masur), 7 oilseeds (rapeseed-mustard, groundnut, soyabean, sunflower, sesamum, safflower and nigerseed) and 4 commercial crops (sugarcane, cotton, copra and raw jute).
  2. While the MSPs technically ensure a minimum 50% return on all cultivation costs, these are largely on paper.
  3. In most crops grown across much of India, the prices received by farmers, especially during harvest time, are well below the officially-declared MSPs.
  4. And since MSPs have no statutory backing, they cannot demand these as a matter of right.
  5. The unions want the Modi government to enact legislation conferring mandatory status to MSP, rather than just being an indicative or desired price.

 

How can that entitlement be implemented?

There are basically three ways.

  1. The first is by forcing private traders or processors to pay MSP. This is already applicable in sugarcane.
    1. Sugar mills are required, by law, to pay farmers the Centre’s “fair and remunerative price” for cane, with some state governments fixing even higher so-called “advised prices”.
    2. The Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act, moreover, obliges payment of this legally-guaranteed price within 14 days of cane purchase.
  2. The second is by the government undertaking procurement at MSP through its agencies such as the Food Corporation of India (FCI), National Agricultural Cooperative Marketing Federation of India (Nafed) and Cotton Corporation of India (CCI).
    1. Such purchases accounted for nearly 50% of India’s rice/paddy production last year, while amounting to 40% for wheat and over 25% in cotton.
    2. Generally speaking, MSP implementation has been effective only in four crops (sugarcane, paddy, wheat and cotton); partly so in five (chana, mustard, groundnut, tur and moong) and weak/non-existent in the remaining 14 notified crops.
    3. The 23 MSP crops together, in turn, account for hardly a third of the total value of India’s agricultural output, excluding forestry and fishing.
  3. The third route for guaranteeing MSP is via price deficiency payments.
    1. Under it, the government neither directly purchases nor forces the private industry to pay MSP.
    2. Instead, it allows all sales by farmers to take place at the prevailing market prices.
    3. Farmers are simply paid the difference between the government’s MSP and the average market price for the particular crop during the harvesting season.

 

Will a legal backing for MSP, a statutory MSP, solve all the ills that plague the agri sector?

No, remunerative price or MSP is only one part of the problems farmers face.

  1. Farmers face many other issues other than price, which itself is not guaranteed given the influence of politicians and cartels in mandis.
  2. They lack information on which crop to grow, when to sow, apply plant nutrients and which pest is attacking their crop.
  3. Farmers are also short of post-harvest technologies to ensure a better shelf life for their produce.
  4. In addition, they do not get adequate facilities to irrigate their lands, with nearly 50 per cent of the land being rain-fed and lacking ample warehouses to store their produce at the village level, besides proper roads to connect them to the mandis.
  5. Legal backing for the MSP could also lead to the danger of the trade keeping away from places where the law is implemented vigorously.
  6. For example, when Punjab said it would make MSP legal and binding, wheat traders said they would keep off the state to avoid trouble for themselves.

 

What would be the fiscal cost of making the MSP legally binding?

  1. The MSP value of the total output of all the 23 notified crops worked out to about Rs 11.9 lakh crore in 2020-21.
  2. Taking an average of 75% yields a number – the MSP value of production actually sold by farmers – just under Rs 9 lakh crore.
  3. The government is further, as it is, procuring many crops. The MSP value of the 89.42 mt of paddy and 43.34 mt of wheat alone bought during 2020-21 was around Rs 253,275 crore.
  4. All in all, then, the MSP is already being enforced, directly or through fiat, on roughly Rs 3.8 lakh crore worth of produce.
  5. Providing legal guarantee for the entire marketable surplus of the 23 MSP crops would mean covering another Rs 5 lakh crore or so.

 

But there must be a catch to all these calculations?

Yes. FCI’s grain mountain is evidence of how cumbersome public procurement and stocking operations can be.

This is not to mention the huge scope for corruption and recycling/leakage of wheat and rice, whether from godowns, ration shops or in transit.

Also, while cereals and pulses can be sold through the public distribution system, disposal becomes complicated in the case of nigerseed, sesamum or safflower.

Even when it comes to sugarcane, the experience of mills accumulating huge payment arrears to growers is proof of the practical limitations of “legal MSP”.

That leaves deficiency payments, which may be a more workable and fiscally feasible option in the long run.

 

Conclusion:

A growing consensus among economists for guaranteeing minimum “incomes”, as against “prices”, to farmers.

That would essentially entail making more direct cash transfers either on a flat per-acre (as in the Telangana government’s Rythu Bandhu scheme) or per-farm household (the Centre’s PM-Kisan) basis.

The resource requirement of such interventions will be so huge that no government will be left with resources to help farmers through other means like investment in public infrastructure, irrigation, and other incentives.

The danger of over-reliance on MSP is already visible in the state of Punjab. Agriculture has reached an almost static stage there.

The state is unable to diversify away from crops like paddy, which is destroying its natural resources and environment, marring long-term prospects of farming.