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What true MSP means

Himanshu writes: It requires the government to intervene when market prices fall below a pre-defined level, not buy all the produce

Written by HIMANSHU |
Updated: December 12, 2021 7:56:22 am
Protesting farmers dance to bhangra tunes at Tikri border after the conclusion of the year-long protests in New Delhi on Thursday. (Express Photo: Tashi Tobgyal)

After more than a year, farmer unions have finally decided to call off their protests with the three controversial farm laws being repealed. In the end nobody is wiser as to why the laws were introduced and why they were withdrawn as the government has refused to discuss it in Parliament. But in the process, it has conceded to the demand of the unions to set up a committee to ensure minimum support prices (MSP) for all farmers along with other assurances, none of which were part of the laws that were passed and repealed.

Among them, perhaps the most controversial and ambiguous is the demand for a guarantee of MSP. It has been interpreted as a mandatory enforcement of trade in agricultural produce, including private trade to be necessarily at or above the MSP for that crop. Another interpretation is the nationalisation of agricultural trade whereby the government promises to buy all the crop produced at MSP. Both these formulations are not correct. But even if they were, there is no way these can be implemented. Commentators have been using these two interpretations to project large estimates of government expenditure needed to implement. While most of these estimates are hyperbole, imaginary and irrational, they fail to understand the true spirit of the demand for a legal MSP.

This ambiguity arises primarily due to the nature of the current MSP regime. By definition MSP is not an income support programme. It is designed to be used as a government intervention to stabilise prices, to provide remunerative prices to farmers. Currently, it is no more than a public procurement programme to meet the requirements of the National Food Security Act (NFSA). As against the official announcement of MSP for 23 crops, only two, rice and wheat are procured as these are distributed in NFSA. For the rest, it is mostly ad-hoc and insignificant.

The current demand for a legal guarantee of MSP has to be seen in the larger context of the situation of farmers. In addition to the twin droughts of 2014 and 2015, farmers have also suffered from declining commodity prices since 2014. The twin shocks of demonetisation and hurried 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 has ensured that the situation remains precarious for majority of the farmers. With rural wages declining in real terms since 2014 and lack of employment opportunities, the crisis in the rural economy has actually worsened. Higher input prices for diesel, electricity and fertilisers have only contributed to the misery. In this context, the demand for ensuring remunerative prices is only a reiteration of the promise by successive governments to implement the Swaminathan Committee report in letter and spirit.

A price intervention scheme is not unique and is a standard intervention used by many countries. A true MSP requires the government to intervene whenever market prices fall below a pre-defined level, primarily in case of excess production and oversupply or a price collapse due to international factors. It does not require the government to buy all the produce but only to the extent that creates upward price pressures in the market to stabilise prices at the MSP level. What is needed is a mechanism to monitor the prices. While such a mechanism already exists, a policy for requisite market intervention is missing.

MSP can also be an incentive price for many of the crops which are desirable for nutritional security such as coarse cereals, and also for pulses and edible oils for which we are dependent on imports. That farmers respond to such interventions is clear from the example of pulses which witnessed an increase in production after the government started procuring them.

However, the current MSP regime has no relation to prices in the domestic market. Its sole raison d’être is to fulfil the requirements of NFSA making it effectively a procurement price rather than an MSP. Precisely why, the food subsidy of more than Rs 2 lakh crore is not a subsidy for farmers, but a subsidy to consumers for providing nutrition security to the country. However, political interventions have meant that actual procurement is way more than actual requirements for NFSA, leading to excess stocks. Apart from being a waste of resources, this is also inefficient and counterproductive, contributing to price distortions. On the other hand, a true MSP may not cost much given that the market intervention is needed only in the case of a price collapse and only for the commodity for which it occurs. The cost of such an operation is unlikely to be significant as long as the government has a mechanism to sell the grain procured in the open market or the export market.

Fortunately, the existence of NFSA also ensures that there is a fully functional distributional mechanism of distributing these commodities. Despite repeated demands from food activists, there has not been any progress in including pulses, edible oils and millets in PDS. These are not just essential for nutritional security but will also increase the pool of farmers likely to benefit from MSP interventions to include small and marginal farmers who grow millets, pulses and edible oil. This will also ensure geographical balance as most of these are grown in rainfed and arid regions. A guaranteed MSP then is nothing more than restoring the true spirit and functions of MSP, applicable to a broad range of crops and all sections of farmers.

It is obvious that there is neither a paucity of funds nor a lack of infrastructural and institutional mechanisms to ensure a guaranteed MSP. It is basically a lack of understanding of what agriculture needs and above all a lack of political commitment to ensure remunerative prices to farmers. But even an efficient and functional MSP is unlikely to be the permanent solution to the deep-rooted crisis in agriculture which suffers from low investment, absence of state support and inefficient management of the economy. But it is certainly the least that the government can do to protect a sector which remains the largest employer and a refuge for the poor and vulnerable as was seen during the pandemic.

This column first appeared in the print edition on December 11, 2021 under the title ‘The effective support price’. The writer teaches at JNU.

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