Demand for guaranteed MSP and govt. fear

Context: Farmers’ organisations continue to demand guaranteed minimum support prices (MSPs) before they withdraw their agitation, even after the government has announced a repeal of the three farm laws. 

• Inthis article we will try to find out "How justified is this demand?"

Status of MSP in India

• MSPs are the prices at which, the government promises to procure agricultural produce from farmers.
• At present, the government announces MSPs for 23 crops, but procurement happens only for a few among them. Also, procurement varies quite a lot across states.
• Till now, the Government is not legally mandated by law to procure under MSP. The government can by its discretion choose, not to procure.

What are the issues/challenges in a legally mandated MSP regime?
A legal mandate for MSP would force the government to purchase all the produce that any farmer wants to sell at the declared MSP. It would also have to procure from all states, and all crops for which MSPs are announced. This will have the following unintended outcomes:

• High cost to the exchequer
• Loss of food grains due to rotting in mandis.
• Increase food inflation.
• Encouragement to unsustainable cultivation of water intensive crops, rice and wheat. This will indirectly contribute to stubble burning.
• It will increase the capacity of buffer stocks. Already, grain stocks lying with the government are more than twice its buffer requirement.

What are the issues that are hampering the growth of agriculture in India?

• Holdings are fragmented and have become uneconomical.
• Lack of focus towards crop diversification
• Public investments compared to subsidies are very less.
• Declining productivity.
• Disguised labor force
• Low income (Farmers earns an average of Rs 27 a day)
• Lack of growth in non-farm sector jobs, limiting diversification of agriculture.

Advantages of MSP

• Price volatility: The system of Minimum Support Price (MSP) system acts as a tool for the government to control sharp fall and rise in the prices of any crops. This helps keep a floor price which does not let the prices fall below a certain point. This can also be used as a tool to control inflation by way of rising prices.
• Surety of minimum prices: The concept of Minimum Support Price (MSP) system acts as a surety to farmers so that their crops get the fair amount for their produce and helps them sustain their losses and does not affect them drastically. This helps them cover the minimum amount expenses in cultivating the crops and pay of the debts which they have.
• Control crops short in supply: Minimum Support Price (MSP) also helps government control the growth of crops which are low in production. The government can offer more price support for these crops so that more and more farmers are tempted to grow these crops with an assurance that they will recover a certain amount from the government with guarantee.
• Fair price shops: The government can use these crops to be sold at government fair price shops at a price lower than market rate. This will also help the government in making these crops available to the below poverty line people at a lower price. This will also help the government recover some amount and reduce the losses of the government.
• Load on banks: The financial system plays a vital role in the smooth functioning of the Indian economy. It is very important that these institutions do not fail as they are majorly run on funds procured by public at large. In case of waive off of loans these create a heavy burden on the banks/financial institutions. These waive offs often lead to foreclosure of banks and specially the small agricultural institutions.

Disadvantages of MSP

• Effect on small and medium scale farmers: According to studies, most of the drought affected farmers are small and medium scale farmers. These farmers do not procure loans from financial institutions. They prefer loans from private money lenders which are not covered under these schemes. In fact farmers who produce on large scale are often seen getting rid of their debt with the help of these schemes.
• Killing of competition: Any interference by the government kills the competition. This affects the agents who procure the crops at lower prices and sell them at higher prices and earn profits. This mainly disturbs the working of people who sell these outputs from farmers into the open market.

Road Ahead
Instead of bypassing the market by using MSPs, the government should make efforts to enable farmers to participate in the market.

• Ramp up investment in the agriculture sector: Provide better irrigation facilities, easier access to credit, timely access to power, and ramping up warehouse capacity and extension services, including post-harvest marketing. This will increase farmers’ bargaining ability and choices before them.
• Boosting India’s industrial and services sectors: Agriculture accounts for just 17% of India’s GDP while employing 55% of its population. Industry and service sectors can potentially take up the excess labor that is presently engaged in unremunerative farm activities. Rapid growth of industries and services for the next couple of decades could help alleviate India’s farm distress.
• Direct cash transfers to the rural poor: In the short term, providing direct cash transfers to the rural poor can alleviate distress. $100 billion in annual subsidies for food, farming and village unemployment should be slowly replaced by a basic income.
• Replicating the success of AMUL in agriculture: Supporting producers’ organizations that capture more of the farm-to-fork value chain would mean better prices for farmers.