Context: The ongoing farmer protests in India have once again brought the issue of Minimum Support Price (MSP) to the forefront. As farmers take to the streets demanding legal guarantees for MSP, the government faces a delicate balancing act.

• The legal guarantee of Minimum Support Price (MSP) is the prime reason for the farmers' protest. Apart from this, the farmers have also demanded the implementation of the Swaminathan Commission’s recommendations (2006), as well as farm debt waiver.

What Is MSP?

• Minimum Support Price (MSP) is the price set by the government at which it directly purchases agricultural products from farmers if the open market prices fall below this threshold.

• The primary purpose of MSP is to protect farmers against drastic price fluctuations during market volatility.

• It ensures a safety net for farmers, especially during bumper production years.

• It covers 22 crops, including paddy, wheat, maize, arhar (pigeon pea), cotton, and mustard seeds and Fair and Remunerative Price for sugarcane.

The MSP is calculated based on different cost components

• A2 Cost: This includes actual paid-out expenses such as seeds, fertilizers, pesticides, labor, and other direct costs incurred during cultivation.

• A2+FL Cost: In addition to A2, this covers the imputed value of family labor involved in farming. It recognizes the contribution of family members who work on the farm without receiving a direct wage.

• C2 Cost: The most comprehensive, C2 encompasses A2+FL and adds rental value of owned land and interest on capital (including machinery and equipment). It represents the total cost of production and ensures a reasonable return on investment for farmers

The MSP is recommended by the Commission for Agricultural Costs and Prices (CACP) based on various factors:

• Cost of Production: The CACP considers the cost incurred by farmers in cultivating a crop, including expenses on seeds, fertilizers, labor, and machinery.

• Demand and Supply: The availability of a particular crop in the market influences its MSP. If there’s excess supply, the MSP may be adjusted accordingly.

• Price Trends: Domestic and international price trends impact the MSP. The government aims to provide a price that covers production costs and ensures a reasonable profit for farmers.

• Terms of Trade: The balance between agricultural and non-agricultural sectors affects the MSP. The government strives to maintain a fair exchange between these sectors.

Significance of MSP

• Income Security: MSP assures farmers a minimum income for their produce. It encourages them to invest in agriculture without fear of losses.

• Market Stability: By setting a floor price, MSP prevents drastic fluctuations in crop prices. This stability benefits both farmers and consumers.

• Food Security: MSP ensures adequate food production. It incentivizes farmers to grow essential crops like wheat, rice, and pulses.

The Swaminathan Commission’s Recommendation

• The MS Swaminathan Commission, in its report, recommended that the government should raise the MSP to at least 50% more than the weighted average cost of production (C2+ 50% formula).

• This formula includes the imputed cost of capital and land rent, providing farmers with a fair return on their investment.

Earlier Events

• Committee Formation: Over two years ago, during the previous farmer protests against the three contentious farm laws, the Union Government established a committee to examine the MSP mechanism further. This committee included farmers’ representatives, central and state governments, agricultural economists, and scientists.

Benefits of Legal Status of MSP

• Providing Income Security: MSP provides procurement by the government at a minimum guaranteed price. Legalising it would ensure that farmers have a guaranteed and fair compensation.

• Prevention of Distress Sales: With guaranteed procurement by government at MSP farmer would not resort to distress sales in case price of crops falls below MSP level.

• Encourages Crop Diversification: The legalisation of MSP would lead to procurement of crops beyond rice and wheat which forms bulk of the government procurement now, which in turn would incentivise farmers to diversify their crops.

Issues with Legal Status for MSP

• Infrastructure: Establishing the necessary infrastructure for MSP enforcement may be complex. Adequate storage facilities are crucial for procuring produce at MSP rates, especially when buyers are scarce.

• Resource Constraints: The government might lack the physical resources to store large quantities of crops. Balancing procurement costs and expenditure becomes a critical concern.

• Fiscal burden: Providing legal guarantee to MSP will greatly increase the food subsidy bill which is already 1.9% of gdp in 2022.

• Market distortion: It will disincetivise private traders from procuring cereals as price fluctuations will make it economically unviable.

• WTO subsidy Principle: It will violate the subsidy principle of WTO according to which subsidies which are market distortionary should be abolished.

World’s Largest Decentralized Grain Storage Plan in Cooperative sector

• Government has approved a plan to create warehouses, custom hiring centers, primary processing units and other agri infrastructure for grain storage at PACS level, through convergence of various GOI schemes, including AIF, AMI, SMAM, PMFME, etc. 

• This will reduce wastage of food grains and transportation costs, enable farmers to realize better prices for their produce and meet various agricultural needs at the PACS level itself. 

• 27 States/ UTs and National level Cooperative Federations such as National Cooperative Consumers Federation (NCCF) and National Agricultural Cooperative Marketing Federation of India Ltd. (NAFED), have identified more than 2,000 PACS for creation of storage capacity under the Pilot Project.

Key Suggestions

• Balanced Agricultural Pricing Policy: The government must come up with a suitable transition to agricultural pricing policy to ensure remunerative prices for agricultural produce through mechanisms like MSP and direct income support schemes.

• Enforce Swaminathan Committee Recommendation: The commission recommended that the MSP should at least be 50% more than the weighted average cost of Production (CoP), which it refers to as the C2 cost.

• Expansion of MSP Criteria: The average expenditure incurred by the farmer on education and health services for his family must also be factored in when MSP is determined.

• Price Deficiency Payments (PDP): It entails the government not physically purchasing or stocking any crop, and simply paying farmers the difference between the market price and MSP, if the former is lower. Such payment would be on the quantity of crop they sell to the private trade.

Enhancing Farmers' Income

• The government should not only bring agriculture activities within Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) but also increase the daily wages.

• Encourage crop diversification and promote high-value and climate-resilient crops to increase farmers' income opportunities.

• Strengthen agricultural marketing infrastructure, including farm-to-market linkages, storage facilities, and market information systems, to reduce post-harvest losses and improve price realisation for farmers.

Investing in Agricultural Infrastructure

• Increase public investment in rural infrastructure such as irrigation facilities, roads, electrification, and storage capacities to enhance agricultural productivity and market access.

• Promote technology adoption and innovation in agriculture through research and development, extension services, and access to modern farming inputs and practices.

• Facilitate access to credit, insurance, and other financial services for smallholder farmers to mitigate production risks and improve resilience to market fluctuations.

Improving Land and Water Management

• Implement sustainable land and water management practices to conserve natural resources, prevent soil degradation, and enhance agricultural resilience to climate change.

• Promote efficient water use through the adoption of drip irrigation, rainwater harvesting, and water-saving technologies to address water scarcity challenges in agriculture.

Empowering Farmers

• Strengthen farmers' organizations, cooperatives, and producer groups to enable collective bargaining, access to markets, and participation in decision-making processes.

Ensuring Social Protection

• Expand social safety nets and insurance schemes to provide income and livelihood support to vulnerable farming households during periods of distress, such as crop failures, natural disasters, or market shocks.

Improving Governance

• Improve governance and regulatory frameworks to reduce bureaucratic hurdles, corruption, and market distortions that hinder agricultural development and farmer welfare.

Conclusion

• Prioritising the needs of farmers in India is essential for ensuring food security, stimulating economic growth, and fostering social equity in India. By investing in agriculture and ensuring farmers' welfare, India can build a more resilient and prosperous future for all its citizens.