MSP guarantee across crops can raise income and demand

Subject: Economy

Section: National economy and National Income

Context:

CRISIL Market Intelligence & Analytics has said that Guaranteeing a Minimum Support Price (MSP) across crops would support farm incomes and spur consumption demand, estimating the “real cost” of such a guarantee at around ₹21,000 crore, based on Marketing Year (MY) 2023 trends.

Details:

MSP-based procurement is done in only a few States.
CRISIL’s analysis focused on 16 of the 23 crops for whom MSPs are announced, which account for over 90% of India’s farm output.
In Kharif 2022 and rabi 2023, just 9% of mustard production was procured, and 3% of five other crops.
In this milieu, guaranteeing MSP for all crops can lead to farmers moving to crops other than paddy and wheat.

Minimum Support Price (MSP):

MSP is the guaranteed amount paid to farmers when the government buys their produce.
MSP is based on the recommendations of the Commission for Agricultural Costs and Prices (CACP), which considers various factors such as cost of production, demand and supply, market price trends, inter-crop price parity, etc.
- CACP is an attached office of the Ministry of Agriculture and Farmers Welfare. It came into existence in January 1965.
The Cabinet Committee on Economic Affairs (CCEA) chaired by the Prime Minister of India takes the final decision (approve) on the level of MSPs.
The MSP is aimed at ensuring remunerative prices to growers for their produce and encouraging Crop Diversification.

Crops Under MSP:

The CACP recommends MSPs for 22 mandated crops and fair and remunerative price (FRP) for sugarcane.
The mandated crops include 14 crops of the kharif season, 6 rabi crops and 2 other commercial crops.

Three Kinds of Production Cost:

The CACP projects three kinds of production costs for every crop, both at state and all-India average levels.
- ‘A2’: Covers all paid-out costs directly incurred by the farmer in cash and kind on seeds, fertilisers, pesticides, hired labour, leased-in land, fuel, irrigation, etc.
- ‘A2+FL’: Includes A2 plus an imputed value of unpaid family labour.
- ‘C2’: It is a more comprehensive cost that factors in rentals and interest for owned land and fixed capital assets, on top of A2+FL.
CACP considers both A2+FL and C2 costs while recommending MSP.
CACP reckons only A2+FL cost for return.
However, C2 costs are used by CACP primarily as benchmark reference costs (opportunity costs) to see if the MSPs recommended by them at least cover these costs in some of the major producing States.

Need for MSP:

The twin droughts of 2014 and 2015 forced the farmers to suffer from declining commodity prices since 2014.
The twin shocks of Demonetisation and the Rollout of GST, crippled the rural economy, primarily the non-farm sector, but also agriculture.
The slowdown in the economy after 2016-17 followed by the pandemic further ensured that the situation remains precarious for the majority of the farmers.
Higher input prices for diesel, electricity and fertilisers have only contributed to the misery.
It ensures that farmers receive a fair price for their crops, which helps in reducing farm distress and poverty. This is particularly crucial in states where agriculture is a major source of livelihood.

Source: TH