Minimum Support Price (MSP) is the assured price at which the government purchases the entire supply of agricultural produce from the farmers if the market price falls below it. It is a kind of insurance against price fluctuations to protect the farmers.
The demand to increase MSP is primarily fueled by low farm remunerations which is compounded by factors like food inflation, market instability, climate-related stress etc.
What is MSP?
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(A2 + FL) incurred by the farmers.
The Commission for Agricultural Costs & Prices (CACP) recommends MSPs for 22 mandated crops and fair and remunerative price (FRP) for sugarcane.
Why is MSP needed to make farming Viable?
The significance of MSP is only when the markets do not clear the price. In such a situation, the farmer gets a return less than the MSP and thus the farmer fraternity goes bankrupt.
How do we define markets? What are the boundaries? Through tariffs and other measures, we have built a national barrier on markets, where gates are opened on the basis of strategic intent. Thus, leaving farmers to a skewed market will further make them more vulnerable.
The farmer’s hands are tied and is locked into a given crop once the germination happens all the way till the harvest.
Farming not only has the usual business risks but also has the enhanced risk of the force majeure elements that destroy the enterprise — a sudden hail storm, drought, unseasonal showers, a pest attack, a locust attack -there are too many things that the farmer cannot control.
These entrepreneur-farmers are operating without a limited liability clause — with no downside protection. Therefore, an MSP provides a powerful signal to the farmer to exercise the choice of sowing a particular crop because the farmer can back-calculate the expected margin.
Note that the M in MSP stands for minimum – the bare essential to make the farm viable.
The significance of MSP is only when the markets do not clear the price.
In such a situation, the farmer gets a return less than the MSP and by this argument we are escorting the farm fraternity towards bankruptcy.
A legal guarantee is, therefore, needed. The ability of the state to address the issue is greater than that of an individual marginal farmer.
The argument that the state will have to procure all the floating stock in the market and may become bankrupt is fallacious.
The intervention of the state in the markets usually covers information asymmetry, arbitrage and cools the markets when they get overheated.
Anybody who looks at the intervention of the central bank in the forex markets would know the importance of market intervention operations.
Only difference is that In the case of agriculture, the issue is more than just volatility management.
Argument against legal sanctity to the Minimum Support Price (MSP)
Providing MSP does not allow the market to discover the prices
If market cleared prices are less than MSP, then the only buyer would be the government; this would render the government bankrupt.
Markets are wonderful; if they have any distortions, the way to negotiate it is through Farmer Producer Organisations (FPOs) — as demonstrated by Amul.
A better way to address the possible income gap is to give an income support-based direct benefit transfer (DBT).
Key suggestions: Need to Develop Agriculture as an Enterprise
While the income support scheme is an interesting instrument and is crop agnostic.
It does not address the issue of viability of the farming operations. There is no doubt that we need to make farming viable.
It is important to address the prices of each crop as a strategic signalling mechanism:
For crops that would be encouraged and those that would be discouraged.
It may be a good idea to declare a low MSP upfront that is legally guaranteed so that the farmers are encouraged to move to an alternate crop
We need to modernise the markets and storage and processing facilities. There is no point in conflating modernisation with liberalisation.
The question of how Amul and dairying in India succeeded also needs interrogation and elaboration.
While the Amul model recognised the inherent power of markets, it took about five decades to make the system competitive.
The investments were made in breed improvement, free veterinary services, better cattle feed, capital subsidy for processing plants, and return-free capital as investments.
The nature of subsidies was smart and innovative. If we need to take Indian agriculture on the path of Amul, we need to start making those investments now.
As a trivia, dairying was the last bit to be liberalised, and it enjoyed protection even when we opened up in 1991.
So let continue with the MSP framework smartly on diversified crops, on a decentralised basis while we develop the markets.
A legal guarantee will only assure the farmers that they will not be bankrupted.