6 min readFeb 17, 2024 09:41 AM IST
First published on: Feb 17, 2024 at 07:35 AM IST
Farmers are back on the streets. Unlike the last time, when they marched to Delhi against the enactment of the three contentious farm laws, this time there is no immediate trigger. The demands of the farmers are manifold, but primarily, they are asking for a legal guarantee for Minimum Support Prices (MSP). While this has been a longstanding demand, there is little clarity on what it actually means. The lack of clarity has obviously led to fear mongering, with exaggerated claims about fiscal costs, monopolisation of agricultural trade and missing markets. There was similar fear mongering during the run-up to enactment of the National Food Security Act (NFSA) and the National Rural Employment Guarantee Act. The reality is that neither of these pieces of legislation has bankrupted the government. Instead, they proved to be a lifeline for people during the pandemic.
MSP is a simple mechanism to ensure the price stability of essential agricultural commodities. Similar mechanisms are available to farmers in other countries. The purpose is to insulate farmers from price volatility with government actions through active intervention when the market prices fall below the MSP. It has been in existence in India for more than five decades. Why, then, are farmers asking for a legal guarantee? Every year the government announces MSP for 23 crops before the sowing season. But for most crops, the announcement of MSP is not followed by any intervention by the government. It is in practice only implemented for rice and wheat, two major crops, and occasionally for pulses and other crops. But even in these cases, market intervention by the government is not done to support the farmers, but to fulfil the statutory requirements to fulfil its obligations under NFSA. Farmers are only demanding that the government implement the MSP scheme as envisaged.
Despite political consensus, with most parties and unions supporting such a legal guarantee, successive governments have dithered on legalising this mechanism. The primary reason has been the fear of excessive fiscal requirement to meet the costs of such a guarantee. Large figures to the tune of Rs 10-18 lakh crore have been floated as the cost of the guarantee. Most of these assumptions are based on a poor understanding of agricultural markets or the role of MSP in stabilising prices.
The belief that a guarantee to implement MSP would mean that the government will have to procure all the agricultural produce is a fallacy for two reasons. First, only a fraction of the produce is available in the market, generally referred to as the marketable surplus. Second, even in the case of marketable surplus, government intervention is only needed in case the market price of a commodity is lower than the MSP. But even in this case, intervention is only necessary to the extent that it creates excess demand and raises the market prices. In most cases, it may be only a fraction of the market arrivals. In years when the market prices are higher, the government will not have to intervene at all. And even if the government intervenes, farmers are unlikely to sell at prices lower than market prices. This happened in the last two years for wheat. As against the 2022 target of 44 million tonnes, government procurement was only 19 million tonnes.
In 2023, government procurement was 26 million tonnes against a target of 35 million tonnes. In both these years, market prices were higher than the MSP. However, it is unfair to treat the cost of procuring rice and wheat as the cost of the MSP programme for rice and wheat. In fact, almost all of it is a subsidy to consumers and not to farmers. But then this is a commitment by the government under NFSA and is necessary, irrespective of the MSP guarantee. Farmers are only getting the minimum value of their hard-earned produce and nothing more.
For the remaining crops which are not part of the NFSA bundle, procurement by the government is not a cost unless the government sells it with a subsidy. The cost for the government is only the difference between the economic cost of procured grain and the issue price. For the remaining crops, which the government does not sell by subsidising, the cost is zero with the entire expense being recovered.
In rare instances, the government can also make a profit by selling the procured produce at a minimal mark-up in the domestic and international markets when market prices are higher. This will not only cool down domestic prices when there is an inflation surge but will also help stabilise market prices. For several years in the recent past, the government has not only undertaken open-market operations but also exported stocks to benefit from higher international prices.
A guaranteed MSP may not solve the farmers’ problems. But it offers a good opportunity to rectify the imbalances in the MSP and procurement system. Procurement today is restricted to certain geographical locations and limited to rice and wheat. A regionally diversified and expanded MSP to cover a larger basket of crops is necessary to bridge the regional imbalances in agricultural productivity. It will also ensure investment, expansion and strengthening of storage management along with crop diversification, which is necessary for natural resource management.
In many ways, the anger of farmers and the demand for a reform of the MSP system reflects years of neglect of the agrarian economy which has seen declining real incomes and real wages. While it is difficult to estimate the cost of such a guarantee, it will certainly be less than the cost of inflation management that the economy has to pay in terms of higher interest payments and rise in cost of capital. Price stability will also protect the average consumer from the vagaries of inflation. More importantly, at a time when the rural economy is struggling with deficient demand and rising inflation, protecting the income of farmers will also help revive the rural economy.
The writer is associate professor, Jawaharlal Nehru University
In 2023, government procurement was 26 million tonnes against a target of 35 million tonnes. In both these years, market prices were higher than the MSP. (Image source: PTI) 
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