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Minimum support price (MSP):

GS Paper 3:

Topics Covered: Issues related to direct and indirect farm subsidies and minimum support prices.

 

Context:

BJP MP Varun Gandhi has introduced a private bill for Minimum Support Price of crops in Parliament.

 

Overview of The farmers right to guaranteed minimum support price realization of agri-produce Bill, 2021:

  1. It seeks to legally guarantee of MSP with financial outlay of Rs 1 lakh crore.
  2. It aims to provide legally guaranteed minimum support price (MSP) for 22 crops that should be set at a profit margin of 50 per cent over the comprehensive cost of production.
  3. Any farmer realising a price less than the above declared MSP shall be entitled to a compensation equal to the difference in value between price realised and the guaranteed MSP.
  4. It also proposes that payments should be made directly into the accounts of farmers within two days of the transaction.

 

Significance:

The declaration of guaranteed MSP to farmers shall result in improved farm realization for potentially 93 million agricultural households, leading to a resurgence in the rural economy.

 

What is MSP?

MSP is the rate at which the government buys grains from farmers. Currently, it fixes MSPs for 23 crops grown in both Kharif and Rabi seasons.

 

How is it calculated?

The MSP is the rate at which the government purchases crops from farmers, and is based on a calculation of at least one-and-a-half times the cost of production incurred by the farmers.

  • The Union Budget for 2018-19 had announced that MSP would be kept at levels of 1.5 the cost of production.
  • The MSP is fixed twice a year on the recommendations of the Commission for Agricultural Costs and Prices (CACP), which is a statutory body and submits separate reports recommending prices for kharif and rabi seasons.

 

Which production costs are taken in fixing the MSPs?

The CACP considers both ‘A2+FL’ and ‘C2’ costs while recommending MSP.

  1. A2 costs cover all paid-out expenses, both in cash and kind, incurred by farmers on seeds, fertilisers, chemicals, hired labour, fuel and irrigation, among others.
  2. A2+FL covers actual paid-out costs plus an imputed value of unpaid family labour.
  3. The C2 costs account for the rentals and interest forgone on owned land and fixed capital assets respectively, on top of A2+FL.

 

The limitations of MSP:

  1. The major problem with the MSP is lack of government machinery for procurement for all crops except wheat and rice, which the Food Corporation of India actively procures under the PDS.
  2. As state governments procure the last mile grain, the farmers of states where the grain is procured completely by the government benefit more while those in states that procure less are often affected.
  3. The MSP-based procurement system is also dependent on middlemen, commission agents and APMC officials, which smaller farmers find difficult to get access to.

 

What is the rationale behind the demand for legalisation of MSP?

Farmers receive less than MSP: In most crops grown across much of India, the prices received by farmers, especially during harvest time, are well below the officially-declared MSPs. And since MSPs have no statutory backing, they cannot demand these as a matter of right.

Limited procurement by the Govt: Also, the actual procurement at MSP by the Govt. is confined to only about a third of wheat and rice crops (of which half is bought in Punjab and Haryana alone), and 10%-20% of select pulses and oilseeds. According to the Shanta Kumar Committee’s 2015 report, only 6% of the farm households sell wheat and rice to the government at the MSP rates.

 

What are the challenges with the legalisation of MSP?

  1. Statutory MSP is unsustainable: A policy paper by NITI Aayog’s agricultural economist Ramesh Chand argued against legalising MSP. It reasoned that any fixed pre-determined price will push away private traders whenever production is more than demand, and there is a price slump in the market. This, in turn, will lead to government de-facto becoming the primary buyer of most farm produce for which MSP is declared, which is unsustainable.
  2. Huge scope for corruption and recycling/leakage of wheat and rice, from godowns, ration shops or in transit.
  3. Disposal problems: While cereals and pulses can be sold through the public distribution system, disposal becomes complicated in the case of niger seed, sesamum or safflower.
  4. Inflation: Higher procurement cost would mean increase in prices of foodgrains, leading to inflation, which would eventually affect the poor.
  5. It will also impact India’s farm exports, if the MSP is higher than the prevailing rates in the international market. Farm exports account for 11% of the total exports of commodities.
  6. With a legally guaranteed higher MSP, India will face stiff opposition at the WTO. The US had successfully won a case against China at the WTO in 2019 which was concerned with China’s domestic support to agriculture in the form of Market Price Support (MPS).
  7. It would lead to a huge burden on the exchequer, since the government would have to procure all marketable surplus in the absence of private participation.
  8. Demands from other sectors: If the Centre makes a law to guarantee 100% procurement in all the 23 crops where MSP is announced, farmers cultivating fruits and vegetables, spices, and other crops will also demand the same.

 

InstaCurious:

What is agroforestry? Why does India need to promote this? Reference: 

 

InstaLinks:

Prelims Link:

  1. Composition of CCEA.
  2. What is CACP?
  3. How many crops are covered under the MSP scheme?
  4. Who announces MSP?
  5. Difference between Kharif and Rabi crops.

Sources: the Hindu.