MSP
The Government has fixed MSPs for 23 crops-- 7 kinds of cereal (Paddy, Wheat, Maize, Bajra, Jowar, Ragi and Barley), 5 pulses (Chana, Arhar/Tur, Urad, Moong and Masur), 7 oilseeds (Rapeseed-Mustard, Groundnut, Soybean, Sunflower, Sesamum, Safflower and Nigerseed) and 4 commercial crops (Cotton, Sugarcane, Copra and Raw Jute).
MSP: Historical Context
Started in the mid 1960’s. The idea was to create a favourable environment and incentivise farmers to increase production by adopting “High Yield Variety” seeds and technology for cereals like Wheat and Rice.
The adoption of the MSP Policy in India was mainly due to food scarcity and price fluctuations provoked by drought, floods and international prices for exports and imports. The policy, in general, was directed towards ensuring reasonable food prices for consumers by providing food grains through the PDS and inducing adoption of the new technology for increasing yield by providing a price support mechanism through the MSP system.
Agricultural Price Commission was set up in the year 1965 (Renamed as Commission for Agriculture Cost and Price in 1985) on the recommendation of LK JHA Committee. The role of the Agriculture Price Commission is to advise the government on agriculture price policy.
Calculation of MSP
The CACP in deciding the MSP for various crops takes into account a lot of comprehensive factors including the supply and demand factors of each crop.
The CACP further projects three kinds of production cost for every crop, both at state and all-India average levels.
Cost A2: Includes the actual costs paid by farmer for purchase of various inputs like seeds, fertilisers, pesticides, hired labour, rent of land & machinery, if hired.
Cost A2 +FL: FL refers to Family Labour. When the unaccounted family labour cost is accounted and added to cost A2, it becomes A2+FL.
Cost C2: C2 stands for Comprehensive Cost. It includes notional costs of family labour, notional rent of owned land and notional interest on owned capital.
The CACP does not do any field-based cost estimates itself. It’s projections are based on the state-wise, crop-specific production cost estimates provided by the Directorate of Economics & Statistics in the Agriculture Ministry.
Govt. is providing MSP on 1.5 times the A2+FL costs.
Farm activists, however, insist upon the application of the 1.5-times MSP formula, originally recommended by the National Commission for Farmers headed by M S Swaminathan, on the C2 costs.
The Initial Success of the MSP Policy
India emerged as a grain surplus country.
Food security at the national level has been achieved.
Food prices remained stable.
Economic transformation in well irrigated areas of Punjab, Haryana, and Western Uttar Pradesh.
The drawbacks of the MSP Policy
MSP policy is biased towards wheat and rice. Leading to excessive production of these crops at the expense of other crops. Farmer diverted land suited fro pulse production towards cereals.
Pulses, oilseeds are important for nutritional security. Lack of production of pulses has caused protein based food inflation.
Increase in public stockholding of cereals leading to unmanageable cost of buffer stock and transportation.
Increased fiscal burden of subsidies on the government.
Way Forward -
Regional equity and resource sustainability is a precondition for achieving nutritional security and balanced production. MSP has failed to achieve this objective of sustainability.
In order to make MSP relevant and efficient, the government has to revamp the policy.
MSP is announced for 24 commodities after which starts the operational part of procurement of the commodities. It has been noticed that many times farmers are forced to make distress sales at a price below the MSP.
For instance, it does not matter for producers of pulses or oilseeds anywhere in the country or for paddy and wheat farmers in Chhattisgarh, Orissa, Assam, Bihar and a majority of the other states as there is no enforcement of the MSP in these cases.
CACP main criteria in deciding the MSP is to take into account cost of production. The CACP completely ignores the demand side factors. When the demand for commodities are falling, and if at that time MSP is kept high, then it will lead to excess supplies and increase in government buffers stock which will be kept idle and will get wasted.
Due to distorted MSP, inefficiency builds in into the system, and the farmers do not bother if growing a particular commodity on land that is unsuitable for its production will raise its cost and make land non-productive in the long run.
Fixing MSP for political reasons and under the pressure of the farmer leaders leads to a total neglect of preference for commodities. It also leads to serious imbalances where what is being demanded is not being produced and what is not being demanded is being produced in the economy.
The small size of land holdings, low productivity, increasing production costs, shrinking employment opportunities outside agriculture, and declining growth rate in agriculture are all major serious issues which cannot be simply resolved by increasing the MSP.
Given their economically unviable holding size, and small quantities of marketable surplus, there will be a marginal increase in the total net income of these farmers from agriculture even if they are given the higher MSP of over and above 50% of crops of production.
The Swaminathan Commission
The Swaminathan commission had recommended several path-breaking measures to resolve agrarian distress in India. These recommendations are of a more vital nature and in all likelihood will provide a long-term solution to the agrarian crisis and farmers’ distress. The National Commission on Farmers recommendations are mainly in the domain of land reforms, irrigation, productivity, credit, insurance, food security, bio-resources, and public investment in agriculture, human development, and the rural nonfarm sector. The Swaminathan commission has thus provided solutions to the agrarian crisis and farmers’ distress both in the domain of the agriculture sector as well as outside the agriculture sector.
The Alternative of MSP
‘Deficiency price payment’ without requiring the government to purchase undesirable quantities and undesirable commodities. Deficiency price payment must be part of the difference between the actual price received by farmers and the MSP. In order to ensure that resale of produce does not take place the size of deficiency payment should be kept less than the charges involved in the first sale of produce like mandi fee, auction, labour charges, etc.
The MP govt launched ‘Bhavantar Bhugtan Yojana’ (BBY) in October 2017. Under BBY, the state government credits the difference directly into the bank accounts of the beneficiaries. The farmers have to first register on a BBY portal, after which they are asked to bring their produce to the mandis at a time specified by the government. The quantity of the produce qualified for the price deficiency payment is determined by the state government on the basis of average productivity and area under cultivation for the crop.
However, the scheme has very limited success, and the scheme is not inclusive as the benefits of the BBY is limited to a small number of farmers who registered under the portal.
Moreover, the farmers who are not registered under the portal have to suffer big losses because traders are suppressing the market. To conclude, BBY is not inclusive and covers only 25 percent of the farmer’s losses and is prone to manipulation by the traders.
A similar Price Deficiency scheme is launched by the Government of Haryana for onion, tomatoes, potatoes and cauliflower and the Government of Telangana (on a pilot basis) where the farmers are given investment support for their working capital needs.
In addition to these expenses, there may be further distortions. The Marketed surplus for all the crops is likely to increase since farmers may find it more profitable to sell all the produce in the mandis. The BBY scheme window is likely to be open for only a couple of months and farmers will have to sell their produce within the short time frame to avail compensation. This will eventually led to decline in the market price in that period because of large supply. The scheme will be worse for the unregistered small and marginal farmers because they will be forced to sell their produce at lower prices at a lower price and will not be compensated for their loses. The scheme will give more power to the lower bureaucracy and traders as all the paper work for farmer registration and sale of produce in the mandi will go through them. Therefore, the scheme may end up helping traders more than the needy farmers.
The government of Telangana ‘Input Support Scheme’ is more inclusive since it does not require farmers to register their areas and crops. The scheme's main aim is to save the farmer from the moneylenders by providing them loans for the purchase of the inputs like seeds, fertilizer, machinery and hired labour. Moreover, the farmers are given a choice to produce any crop and sell it anytime in a mandi of his choice. The Telangana model is crop neutral, more reasonable and transparent. The scheme is based on market mechanisms as it does not distort the prices of the crops.
In contrast, the Government of Telangana and Government of Karnataka has plan to launch the ‘Input/Income Support Scheme’ on a per hectare basis for both the Kharif and Rabi season in 2018-19. The scheme is more inclusive since it does not require farmers to register their areas and crops. The scheme's main aim is to save the farmer from the moneylenders by providing them loans for the purchase of the inputs like seeds, fertilizer, machinery and hired labour. The amount will be directly paid into the bank accounts of the farmers before the beginning of the sowing season. On similar lines, Karnataka Government also plans to implement DBT of Rs 5000 per hectare for dryland farmers in Kharif 2018.
Pricing policy for sugarcane
The pricing of sugarcane is governed by the statutory provisions of the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act (ECA), 1955. Prior to 2009-10 sugar season, the Central Government was fixing the Statutory Minimum Price (SMP) of sugarcane and farmers were entitled to share profits of a sugar mill on 50:50 basis. As this sharing of profits remained virtually unimplemented, the Sugarcane (Control) Order, 1966 was amended in October 2009 and the concept of SMP was replaced by the Fair and Remunerative Price (FRP) of sugarcane. A new clause ‘reasonable margins for growers of sugarcane on account of risk and profits’ was inserted as an additional factor for working out FRP, and this was made effective from the 2009-10 sugar season.
Accordingly, the CACP is required to pay due regard to the statutory factors listed in the Control Order, which are
the cost of production of sugarcane;
the return to the grower from alternative crops and the general trend of prices of agricultural commodities;
the availability of sugar to the consumers at a fair price;
the price of sugar;
the recovery rate of sugar from sugarcane;
the realization made from the sale of by-products viz. molasses, bagasse and press mud or their imputed value (inserted in December 2008) and;
Reasonable margins for growers of sugarcane on account of risk and profits.
States also announce a price called the State Advisory Price (SAP), which is usually higher than the SMP.
Other Major Support Schemes of Government
Market Intervention Scheme
MIS, is implemented at the request of State Governments for procurement of perishable and horticultural commodities in the event of fall in market prices.
Under MIS, funds are not allocated to the States. Instead, the central government share of losses as per the guidelines of MIS is released to the State Governments/UTs, for which MIS has been approved based on specific proposals received from them.
Price Supports Scheme (PSS)
The Department of Agriculture and Cooperation implements the PSS for procurement of oilseeds, pulses and cotton, through NAFED which is the Central nodal agency, at the Minimum Support Price (MSP) declared by the government.
NAFED undertakes procurement as and when prices fall below the MSP.
Procurement under PSS is continued till prices stabilize at or above the MSP. Losses, if any incurred by NAFED in undertaking MSP operations are reimbursed by the central Government. Profit, if any, earned in undertaking MSP operations is credited to the central government.
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