The Cabinet has approved a steep rise in the minimum support price (MSP)of crops, giving farmers the promised 50% return on input costs, a politically astute move that can ease farm distress and boost rural demand if implemented effectively, but it can also stoke inflation.
The biggest increase in MSP, about 40-50%, is for coarse grains that are planted by the poorest farmers, mostly in unirrigated areas. About a quarter of India’s area under such crops is in poll-bound Rajasthan, with the rest split between several states including Maharashtra, Karnataka, Uttar Pradesh, Odisha, Andhra Pradesh and Madhya Pradesh.
What is MSP?
The Minimum Support Prices were announced by the Government of India for the first time in 1966-67 for wheat in the wake of the Green Revolution and extended harvest, to save the farmers from depleting profits. Since then, the MSP regime has been expanded to many crops. Minimum Support Price is the price at which government purchases crops from the farmers, whatever may be the price for the crops.
How is MSP decided?
The government decides the support prices for various agricultural commodities after taking into account the following:
- Recommendations of Commission for Agricultural Costs and Prices
- Views of State Governments
- Views of Ministries
- Other relevant factors.
Various Issues around MSP
The major issues around the Minimum Support Price Scheme are as follows:
The Crop production is still unviable despite so many years of crop production
Even after so many years of operation, the crop production is still increasingly unviable. The support prices that are being provided do not increase at par with an increase in the cost of production. A rating agency, CRISIL pointed out that the increase in MSP has indeed fallen in the years between 2014-17. While in the years 2009-13, the annual growth of MSP was around 19.3%, it has become only 3.6% in 2014-17. It has been observed that this decrease in MSP has contributed further to the acceleration of distress of farmers. This deceleration in rates especially at a time when agricultural prices in the domestic market have become equivalent to the international prices, leading to rising in competition from low-cost imports.
MSPs have unequal access
This problem has been in existence since the creation of this scheme. The benefits of this scheme do not reach all farmers and for all crops. There are many regions of the country like the north-eastern region where the implementation is too weak.
Effects of Inflation
There are instances of procurement below MSP as procurement is tardy and trade and other policies sometimes reduce the market prices during good harvest years also. It has an impact on inflation. Lower the market price; lower the MSP and eventually, market prices become dependent on MSP due to market intervention measure.
Disadvantages of procurement
Almost 2/3rd of the total cereal production is taken through the route of MSP, leaving only 1/3rdfor open market. As a result, a farmer who chooses the MSP route cannot take advantage of beneficial market prices and has to depend solely on the MSP. It prevents earning of profit by producers. This has created a shortage of crops in the open market also which has a serious impact on consumption pattern. It has shifted consumption towards non-cereal foods (that are available more in the open market relatively), but production has not risen simultaneously, causing a production-demand gap.
This kind of procurement without sufficient storage has resulted in huge piling of stocks in the warehouses. The stock has now become double the requirements under the schemes of PDS, Buffer stock etc. So, many grains have rotten in the storages.
Issues in WTO
India’s MSP scheme for many crops has been challenged by many countries in the WTO. For example, Australia has complained of the MSP on wheat, US and EU complained of sugarcane and pulses MSP. They have been claimed to be highly trade-distorting by its method of calculation. If the current process continues, the country will face international criticism for breaching the 10 per cent norm for subsidy on farm production set by the WTO.