The system of Minimum Support Prices (MSP) has remained under pressure since it was started in 1965, especially on issues related to inclusion of crops, the formula or basis of MSP, effective implementation and even its enforcement. In fact, it is rather ironic that maximum protests around MSP are witnessed in the region which has benefitted the most from it and where it has been almost perfectly implemented.
The main reasons for excessive focus on MSP are inefficient and poorly competitive markets, the failure of markets to evolve to meet the changing requirements of the farm sector, neglect of non-price factors to raise productivity and crop income and the direct and instant effect of prices on farm income.
For almost 50 years, MSP implementation remained largely restricted to a few states and to paddy (rice), wheat and cotton. Low growth rate in agricultural income, decline in the terms of trade for agriculture and increase in farmers suicides from the period between 1993-94 to 2004-5 directed attention towards remunerative prices to address agrarian distress. The National Commission on Farmers (popularly known as Swaminathan Panel), constituted in 2004, submitted its report in 2006. It made a large number of suggestions and recommendations, which also included reforms in the Agricultural Produce Market Committee (APMC) market, contract farming, land reform etc. One of the many recommendations of the Commission was that MSP should be at least 50 per cent more than the weighted average cost of production.
Farmers as well as political parties started vying with each other to champion the implementation of the recommendations of this report, especially those related to MSP. So much so, other more valuable recommendations have been overshadowed and farmers are rallying only around this.
MSP Concept
MSP was originally conceived as a floor price that protects farmers against losses, leaving some margin to incentivise adoption of improved technology and investments in farming. The level of margin to be given above cost was left to the Commission for Agricultural Costs and Prices (CACP), guided by a set of terms of reference. The MSP proposed by the Swaminathan panel (henceforth called new MSP) made it compulsory to include at least 50 per cent margin over cost. The report does not mention any reason for doing so. This also took away the power of the CACP to keep MSP relevant to demand-side factors and the open-market situation. The second issue related to the cost concept — whether it should be A2+imputed value of family labour or Cost C2, which included imputed value of rent for own land and interest on fixed capital of farmers. Logically, margins should be calculated only on the costs incurred by farmers. Farmers’ unions are agitating to make MSP legal guarantee and also to fix it by including at least 50 per cent margin on cost C2. So their demand includes two things — one, MSP which is totally justified and two, a particular level of MSP.
Issues Related to New MSP
The major issue arising from the new MSP concept is that if demand-side factors do not support the new MSP, the system of marketing will collapse and farmers will suffer. According legal status to MSP, as demanded by some groups of farmers, can also be counterproductive as trade is not bound to buy the entire surplus at legal price if they find it impossible to sell the same produce in the open market with required business margins. It is argued that the government should buy this produce like it is doing for rice and wheat — a situation that will lead to nationalisation of agricultural trade. The third option suggested by some quarters is a system of Deficiency Price Payment (DPP). This is a workable approach but this turns out to be very costly if there is a large gap between reference price and the MSP, making it fiscally unsustainable. This option, however, has already been offered by the central government to states and some are implementing it. Besides the fiscal burden, the main issue of DPP is that if it exceeds 10 per cent, it is open to a challenge in the World Trade Organization. If the new MSP in any form is much higher than the open market price, then India’s exports will also be jeopardised.
Progress in new MSP regime
The BJP government accepted the recommendation of the Swaminathan panel to fix MSP by adding a margin of at least 50 per cent to A2 cost + imputed cost of family labour. Since then, rice and wheat are procured at the new MSP by the central government. Serious efforts have been made to expand coverage of the new MSP to more states and more crops. Extending MSP to 23 crops throughout the country is a humongous task, difficult for the central government alone. Therefore, two other schemes, namely, PM AASHA (Pradhan Mantri Annadata Aay Sanrakshan Abhiyan) and Price Deficiency Payment, have been offered to states. Thus, an effective mechanism has already been created for implementing new MSP in all the crops. But, there is a need to expand it.
Way forward
Ensuring remunerative prices for farmers is essential. Some crops and agriculture segments can give better growth through market forces while some require government support through systems like MSP. For instance, horticultural crops (not covered under MSP) have experienced more than two times the growth of rice and wheat in the last 10 years. This shows that the power of demand-driven factors can be much stronger than government price-support in pushing growth and farmers’ income. The new MSP has the potential to stifle such demand-driven growth.
It is also pertinent to mention that a price policy is required to balance the interests of consumers and producers, that include a large percentage of farmers as net consumers.
If the MSP includes a small margin, as was the case before Swaminathan’s proposal, it can be subsumed in MSP. However, the new MSP requires a separate treatment of margin. It is suggested that the country should follow a system of Assured Price to Farmers (APF), which includes a MSP component and margin or profit component. MSP should be equal to cost C2. This will include some net return to the farmer. Farmers should get some margin over and above C2 cost which should be decided each year by an expert body such as CACP. The margin should be kept variable unlike MSP which always moves on a rising trend. Giving MSP to include 50 per cent margin over cost C2, as demanded by the agitating farmers, defies any logic and will turn out to be fiscally ruinous for the economy.
For implementation, MSP crops should be divided into two categories: Crops of all-India importance and crops of regional importance. Centre should take responsibility for implementing APF for the first category. The responsibility for APF for crops of regional importance should be entrusted to states, with shared funding.
The Swaminathan panel repeatedly emphasised the need for a wide range of reforms. States must study these recommendations and implement those necessary to enable markets to pay remunerative prices to farmers and reduce dependence on government intervention for MSP. Farmers should support such reforms — they were also very dear to Swaminathan.
The writer is member, NITI Aayog. Views are personal
For almost 50 years, MSP implementation remained largely restricted to a few states and to paddy (rice), wheat and cotton. (File/ Express Photo by Gurmeet Singh) 
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