Minimum Support Price
Minimum Support Price
“What I want and what I get”
Why Farmers are still unhappy with hiked MSP?
Is MSP Panacea for all farm sector Ills?
Why MSP is sometimes referred as Inadequate, inefficient and ineffective?
Is MSP in its present Avatar Outliving utility?
Many such bubbling questions will become clear with this article!
Let’s Start with Basics
What is Minimum Support price?
- Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices.
- The Government of India announces the minimum support prices at the beginning of the sowing seasonbased on the recommendations of the Commission for Agricultural Costs and Prices (CACP).
- Fundamental Twin Objective behind MSP
Q. With reference to Minimum Support Price Consider which one of the following is correct?
- Minimum Support Price is fixed by Commission for Agricultural Costs and Prices (CACP)
- Minimum support price announced only when supply is more than demand
Select the right answer using the code given below
a. 1 only
b. 2 only
c. Both 1 and 2
d. Neither 1 and 2
EVOLUTION OF MSP
When the system of MSP was not there traders exploited farmers, they were insensitive towards the plight of farmers. They were forced to sell at much lower price so to save them from all this MSP was introduced. It is recommended by CACP. The Commission for Agricultural Costs & Prices (CACP since 1985, earlier named as Agricultural Prices Commission) came into existence in January 1965.
Determination of MSP
The prices of agricultural commodities are inherently unstable, primarily due to the variation in their supply, lack of market integration and information asymmetry – a very good harvest in any year results in a sharp fall in the price of that commodity during that year which in turn will have an adverse impact on the future supply as farmers withdraw from sowing that crop in the next / following years. This then causes paucity of supply next year and hence, major price increase for consumers. To counter this, MSP for major agricultural products is fixed by the Government, each year. MSP is a tool which gives guarantee to the farmers, prior to the sowing season, that a fair amount of price is fixed to their upcoming crop to encourage higher investment and production of agricultural commodities. The MSP is in the nature of an assured market at a minimum guaranteed price offered by the Government. The MSP is fixed on the recommendations of the Commission for Agricultural Costs and Prices (CACP). The CACP is a statutory body and submits separate reports recommending prices for Kharif and Rabi seasons. The Central Government after considering the report and views of the State Governments and also keeping in view the overall demand and supply situation in the country, takes the final decision.
While recommending price policy of various commodities under its mandate, the Commission keeps in mind the various Terms of Reference (ToR). Accordingly, it analyzes.
Crops Covered
Government announces minimum support prices (MSPs) for 22-23 mandated crops and fair and remunerative price (FRP) for sugarcane.
How Decentralized Procurement better than Central Procurement?
- FCI, the nodal central agency of Government of India, along with other State Agencies undertakes procurement of wheat and paddy under price support scheme.
- Coarse grains are procured by State Government Agencies for Central Pool as per the direction issued by Government of India on time to time. The procurement under Price Support is taken up mainly to ensure remunerative prices to the farmers for their produce.
De-centralised procurement of food grains help in
- Cutting transportation
- Storage costs.
- Efficiency
- Widening the coverage
Economic Cost to FCI
- The economic cost has three main components – procurement cost, procurement price, and distribution cost.
- The procurement incidentals are the initial costs incurred during procurement of food grains. The FCI buys food grains from the farmers at the pre-announced Minimum Support Price.
- The distribution costs include freight, handling charges, storage charges, losses during transit and establishment cost.
Q. The economic cost of food grains to the Food Corporation of India is Minimum Support Price and bonus (if any) paid to the farmers plus[UPSC Prelims 2018]
A. transportation cost only
B. interest cost only
C. procurement incidentals and distribution cost
D. procurement incidentals and charges for godowns
Hint: Extreme worded statements are always wrong. Here, both option A and B contain extreme word ‘only’. So, they ought to be wrong, and we are left with 50:50 between C or D
Ans: C
Q. With reference to Minimum Support Price Consider, which one of the following is correct?
- Minimum Support Price announced is 50% of Cost of Production
- Minimum Support Price takes into consideration, Cost C2
Select the right answer using the code given below
a. 1 only
b. 2 only
c. Both 1 and 2
d. Neither 1 and 2
Doubling Farmers Income– MSP as per new formula will be 50% over cost of production
- Still why farmers are unhappy why?
- Will New MSP help in fulfilling dream of doubling Farmers income by 2022?
- Do New MSP Justifies MS Swaminathan Committee Recommendation?
To understand this we need to understand the Cost Concept
Explanation:
Can MSP be a game changer from cycle of poverty to cycle of prosperity?
Drop and drop of water only fills an ocean, a minimum support from government is asource of motivation and inspiration for farmers that if everything goes wrong, MSP will be with us, it is like sovereign guarantee to them. Multiple benefits under MSP are mentioned as
Disadvantages with MSP –
Why MSP is sometimes referred as Inadequate, inefficient and ineffective?
Is MSP in its present Avatar Outliving utility?
- Flawed Arithmetic: The MSP announced by government is 1.50 times of cost A2 + CL but requirement is of 1.5 times of C2. Hence, the present system is not making much difference in increasing farmers income.
- All India Average: The cost of cultivation varies across state but MSPs are based on All India Average
- A drop in ocean: 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.The Shanta Kumar committee to review the functioning of the Food Corporation of India (FCI) had found that only 6% farmers benefit from the MSP
- Inventorycost: 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.
- WTO and trade distortion: 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.
- Market distortion: It distorts the free market. It favours some particular crops over other crops. Not all farmers have been able to get the benefits of MSP because of lack of awareness. Higher MSP over-incentivize production leading to supply glut. Hikes in MSP also adversely affect the exports by making Indian farm goods on competitive especially when international market prices are lower. It does not cover perishables.
- Crop + Regional Imbalance: MSP is focused more on Wheat and Rice, which has led to imbalance in production of other crops. The data is skewed and also Eastern part of country cannot reap the benefit compared to Northern India due to lack of Procurement machinery.
- Monopoly and competition: Any interference by the government kills the competition. This affects the agents who procure the crops at lower prices, sell them at higher prices, and earn profits. This kills competition and reduce system efficiency.
- Weak Procurement system: For MSP to succeed an efficient procurement policy must exist.
- Ecological Disaster – Rice – Wheat – Rice cycle due to more prominence and popularity of MSP in these farmers are reluctant to change crop which discourage crop rotation, excess use of water, deterioration of soil health etc. ultimately leading to disaster for ecology
- Fiscal stress & lack of economic foresightedness – hike in MSP means, FCI will procure more, which will increase food subsidy bill, finally widen fiscal stress.
- Fanning Inflation:MSP acts as a benchmark for the market. A higher benchmark price for essential food crops such as paddy, oilseeds and pulses has the potential to fan inflation especially in the present context when international crude oil prices are at elevated levels and the rupee stands substantially depreciated. Worse, we have seen in the case of pulses, farm-gate prices in 2016-17 and 2017-18 were far lower than the specified MSP.
- Skewed Machinery: Being open-ended scheme there is no limit to procurement, on one side there is relentless procurement of rice and wheat and on other side due to lack of procurement machinery others crops procured are minimal.
How MSP can be Re-Engineered?
What is Price Deficiency Payment system?
MSP has distorted cropping patterns, with excessive focus on the cultivation of wheat, rice and sugarcane in the procurement states at the expense of other crops such as pulses, oilseed and coarse grains. It has also resulted in depletion of water resources, soil degradation and deterioration in water quality in some states, especially in the north-western region. At the same time it has discriminated against eastern states where procurement at the MSP is minimal or non-existent. One measure that can help remove distortion in the MSP system to some degree is the system price deficiency payment. While MSP may still be used for need based procurement under the deficiency payments system, a subsidy would be provided on other targeted produce in case the price falls below an MSP-linked threshold. This approach would not require procurement and thereby preventing the accumulation of unwanted stocks. More importantly, it would spread price incentives to producers in all the regions and all the crops considered important for providing price support. Each farmer would register her crop and acreage sown with the nearest APMC mandi.
- Under this, farmers will be compensated for the difference between the MSPs for selected crops and their actual market prices.
- MSP – Actual Price = Price Deficiency à Difference paid à No need of Physical Procurement
- For crops such as rice and wheat where MSP is effective now, the same will continue.
- For other targeted crops, price deficiency payments system will be introduced.
- However, notably there may be a cap on the extent to which the Centre will bridge the gap between MSP and market price.
- A farmer would have to register with the nearest APMC mandi and report the total area sown, to avail this benefit.
- The subsidy would be paid via Direct Benefit Transfer (DBT) into the farmer’s Aadhaar-linked bank account.
What are the benefits?
The key benefit from the price deficiency payment is that it will reduce the need for the government to actually procure food crops, transport and store them and then dispose of them under PDS. The difference between the support and market prices can instead simply be paid in cash to the farmer. Price deficiency payment can also keep India’s bill on food subsidies under check.
- Subsidy Bill – The government has been accumulating large food grain stocks in its godowns over and above the buffer requirement, leading to storage and wastage costs.
- Direct Payment – Under the new system, the government can pay in cash to farmers, the difference between the support and market prices.
- Efficiency and overhead costs – This will actually reduce the need for the government to procure food crops, transport and store them, and then dispose of them under PDS.
- Resultantly, NitiAayog proposes, this system can keep India’s bill on food subsidies, and storage and wastage costs under check.
- It can also address to an extent the world nations’ concern on India’s procurement subsidies being trade-distorting.
Scheme by Government for Price Deficiency Scheme
What is PM-AASHA?Pradhan MantriAnnadataAaySanraksHanAbhiyan
The three schemes that are part of AASHA are:
PLAN FOR MINIMUM RESERVE PRICE (MRP)
- The NitiAayog is planning to set up a group to examine “replacing the minimum support price (MSP) by a minimum reserve price (MRP), which could be the starting point for auctions at mandis”
- The group should also examine if MSP can be fixed based on the three different criteria — surplus produce, products in deficit in domestic market but available globally and products that are in deficit both domestically and globally, the report added.
SHANTA COMMITTEE RECOMMENDATION RELATED TO PROCUREMENT
- Allow private players to procure and store food grains.
- Stop bonuses on minimum support price (MSP) paid by states to farmers, and adopt cash transfer system so that MSP and food subsidy amounts can be directly transferred to the accounts of farmers and food security beneficiaries.
- FCI should involve itself in full-fledged grains procurement only in those states which are poor in procurement. In the case of those states which are performing well, like Haryana, Punjab, Andhra Pradesh, Chhattisgarh, Madhya Pradesh and Odisha, the states should do the procurement.
Q. What do you mean by Minimum Support Price (MSP)? How will MSP rescue the farmers from the low income trap? (150 words, 10 marks, asked in UPSC Mains-2018)
Introduction:
Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices, which is announced by Government on recommendation of CACP every year before sowing.
How it will rescue from low-income trap?
MSP certainly helps in the rescue by reversing cycle of poverty to cycle of prosperity
- Glut in marketàFall in demand à No MSP à Exploitation by trader à Low Income àNo recovery of cost of Production à Poor investing capacity next season à less production à Less Income
- Distress Sale – When there is glut in market and produce is being purchased in through away price, an assured income helps in recovery of cost of production
- Setting a Benchmark – The price set by government helps in fixing price in open market, which will certainly help in getting good price.
- Better Investing Capacity next season – since he receives better price this season he will encouraged to invest more and earn more next season
- Selecting the right crop – As government announces MSP before sowing it helps in selecting right crop which can give in return better income.
Conclusion:
Hence, the concept of MSP needs to be promoted with transparency, efficiency and innovations such as
- Increase in MSP to 150% of cost C2
- Encouraging scheme like Pradhan MantriAnnadataAaySanraksHanAbhiyan (PM-AASHA) to revamp the MSP procurement system.
Is MSP Panacea for all farm sector ills?
- We need to go much beyond announcing MSP routinely because MSP (and an annual hike thereof) is not a panacea for the ills of the farm sector.
- We desperately need farm resurgence. That alone can lift large sections of farmers (about 130 million farming families) out of their present distress situation.
- For sustained resurgence, we need to address the structural problems.
Adopting the following six mantras should help transform the moribund agriculture sector:
- Strengthen the input delivery system;
- Rapidly expand irrigation facilities;
- Infuse multiple technologies in agriculture;
- Invest in rural infrastructure;
- Exploit the country’s prowess in ICT; and
- Build capacity among growers to withstand market volatility
Unfortunately, there is no one-step solution to solve the farm issues. We need to move in several different directions simultaneously.
Ending with an Irony, Rightly said by John F. Kennedy
“The farmer is the only man in our economy
Who buys everything at retail,
Sells everything at wholesale,
Pays the freight both ways.”
Inputs From
Sangeet Sir
Gold Medalist Bsc and Msc Agriculture Science