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Tuesday, January 18, 2022

Legal MSP: A right and a necessity

🔴 Pushpendra Singh writes: It will encourage crop diversification and food security. Arguments claiming that it is not viable are based on poor data, bad economics

Written by Pushpendra Singh |
Updated: December 31, 2021 9:10:05 am
Private sector purchases may be below, at par or above the MSP, depending on market demand.

Farmer unions suspended their year-long agitation after the government repealed the three farm laws and later reached an agreement on other demands, including forming a committee to look into the issue of a legal guarantee for minimum support prices (MSP). This demand has become the subject of much debate since the start of the farmer agitation, centred around its economic and legal feasibility. Economists have put forth many arguments, but most are not supported by data or sound economic logic. Ashok Gulati and Shweta Saini wrote (‘How to help the farmer’, IE, December 20) that Rs 5.4 lakh crore will be required to purchase just 10 per cent of the output of 23 MSP crops, excluding sugarcane. Nothing could be farther from the truth.

Let’s frame what the demand actually is. It has two parts: First, MSP should be based on the comprehensive cost of production C2, as determined by the Commission for Agricultural Costs and Prices (CACP) plus 50 per cent as recommended by Swaminathan Commission. Second, the 23 crops for which MSP is currently announced by the government should be legally purchased at or above the MSP price by anyone who “willingly enters” the market. The MSP of a crop should be treated as a “reserve price”, below which no trade should be allowed legally. Farmers are not demanding that the government or a trader be “forced to buy all the market surplus” at MSP. Irrespective of the quantity of a crop they are willing to buy, they must not buy it below the declared MSP. It’s also understood that the government would keep on buying quantities required under the Food Security Act and for meeting the buffer norms for foodgrains.

Now, to the economics. The total value of the output of the 23 crops at MSP prices for 2020-21 was about Rs 12 lakh crore. (This was also the estimate of Harish Damodaran, ‘What meeting MSP demand would cost govt’, IE, November 29.) The total MSP value for a crop is calculated after multiplying the government’s figures for the annual production quantity by the MSP. Adding all the 23 MSP crops gives the above figure. This is government data and simple math. But all of the produce is not marketed or sold. The population of farmers, including their family members, is about 50 per cent of the country. They retain a big part of their produce for self-consumption, animal feed, and seeds. Some of it is also exchanged within the village and a part is also eaten by rodents or perishes during harvesting, transportation and storage. About Rs 4 lakh crore worth of the 23 MSP crops is consumed in this manner. Only about Rs 8 lakh crore worth of MSP crops is actually marketed. If we look at the data for the government purchase of these 23 crops at MSP, including sugarcane, the amount comes to about Rs 4 lakh crore. So, only about Rs 4 lakh crore worth of MSP crops are being bought by the private sector. Farmers are seeking the legal enforcement of MSP on this portion as well.

Private sector purchases may be below, at par or above the MSP, depending on market demand. If we take the aggregate for all the 23 MSP crops, the total price paid by the private sector is on an average 25 per cent below the MSP value. So, currently, the private sector is purchasing the Rs 4 lakh crore worth of MSP crops for about Rs 3 lakh crore. If there was legal status for MSP, the private sector would have paid a maximum of Rs one lakh crore more to the farmers for the same quantities in 2020-21. The government would not be under any greater financial burden. If MSP is enforced, the private sector may purchase the same or lesser quantity, depending on the demand.

By giving legal status to MSP, this extra Rs 1 lakh crore would flow from the private sector to the farmers, who will spend it and create more demand in the economy. This will lead to an increase in employment, investment and eventually, government taxes. Ensuring all the 23 crops are legally sold at MSP will also lead to crop diversification as there would be no incentive to grow only those crops where MSP is now available — mostly paddy, wheat and sugarcane. So, the country would also come out from under surplus paddy, wheat and sugarcane production situation, which will have multiple economic and ecological benefits.

A legal backing for MSP is a great instrument to control the production quantities of various crops to match demand. The country could also become self-sufficient in edible oils and pulses if we ensure remunerative MSPs for these crops. This has been proven in the case of pulses where production has increased substantially, reducing import dependence over the last four years. If the government and private prices are the same, farmers won’t seek out the government to purchase their crop. So the government will not be under pressure to buy more than it requires.

The 23 MSP crops consist of staple cereals, pulses, oilseeds and a few cash crops. Our country still ranks poorly on the global hunger index, so these crops are always in demand. Some economists argue that if the MSP is legally enforced, the private sector won’t purchase the crops and all the quantities would have to be purchased by the government. Sugarcane prices are prescribed by the government but private mills have not stopped their procurement. And have industries closed due to the Minimum Wages Act? Is nobody purchasing petrol, diesel because the government is charging exorbitant taxes?

Ensuring remunerative prices for our farmers is also essential for food security. Food security is tied to national security and sovereignty. Farmers know that there is no cogent economic or fiscal argument to deny them this right. Legal MSP is the right of our farmers and they won’t stop until they get it. Otherwise, it won’t be long before we fall back to the “ship-to-mouth” import-dependent foodgrain situation of the 1960s.

This column first appeared in the print edition on December 31, 2021 under the title ‘Minimum support, maximum gain’. The writer is president, Kisan Shakti Sangh and an alumnus of the Institute of Rural Management, Anand (IRMA)

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