Minimum Support Prices (MSP) and income
Note of caution- This piece was written just after the Monsoon session of Parliament in 2020 concluded when the bills were first introduced. The cabinet has since announced that it seeks to repeal the bills in Winter session of 2021. The bills were being reviewed by a committee constituted by the Supreme Court in a bizarre order transgressing judicial prudence after the bills were put in cold storage by the Court (after the government proposed to do the same) following mass protests by sections of farmers and farmer unions. The issues highlighted still persist and are set to persist as a majority government having 303/543 seats in the Lower House of Parliament either lacked the prudence to hold proper consultations prior to enacting the policy or worse, lacked the political will to stick with sound policy because of political considerations. The author solemnly apologises for the outdated introductory paragraph and prays the same would not negatively affect the reader’s engagement with the rest of the piece .
Introduction
The four farm bills passed by the government of India on the twilight of the COVID-ridden monsoon session of the Parliament have generated significant backlash. Ranging from about a dozen deaths in the immediate aftermath, union farm minister’s resignation, the withdrawal of a prominent party from the ruling coalition, strikes by farmer’s organisations, state governments passing or contemplating passing legislation and has also involved the Supreme Court in multiple petitions all seeking to nullify the effect of the bills. Meant to ‘liberate’ the functioning of the agriculture sector- overburdened ironically not from a lack of food grain but from surplus without proper storage infrastructure from successive governments tendency of retaining status quo. A key concern of the farmers appears to be the omission of the Minimum Support Price regime in the legislation itself- leaving it again to the executive’s prerogative.[1] There is no indication that this government is at all interested in dismantling the system created in a production deficient India of the 60s and has repeatedly assured the stakeholders that no such step is being contemplated anytime soon.[2] However, it is a possibility that the same can now be done without much legislative scrutiny or hassle and hence the situation should be mulled over critically.
In the complex system that is the pricing policy of the agriculture sector in India, the Minimum Support Price (MSP) has a central role. In its essence, it is a form of market intervention policy to insure the farmer against any sharp decline in market prices and a protection to farmer incomes. The notification of the prices is done by the union executive on recommendation of the Commission of Agricultural Costs and Prices (CACP) before the start of the sowing season. This assessment takes several things into account the actual cost of production (A2) and family labour that goes into production of a crop. There have been recommendations to incorporate another factor that takes into account the cost of land into account as well (C2). The protections are meant generally for seasons where agricultural produce is high. Surplus of the agricultural product in the market would result in price wars between the producers and as they face a race against time to sell the goods due to lack of proper storage facility. Thus, to prevent farmers from incurring losses which would make the agriculture sector completely disincentivised, the government intervention ensures that for every season, a minimum price for farming is guaranteed for the farmers. The MSP serves as a long-term guarantee for investment decisions of producers. It came with an assurance that prices would not fall below a fixed level, even in case of a bumper crop. The MSP was introduced to provide financial stability to the agricultural system and encourage production.
The benefits of this system, often maliciously and deliberately painted by vested interests as mere government support to an unprofitable business are mutual. The way the minimum pricing does take effect is also indirect. The farmer is at liberty to sell at a price he desires. Ideally, the market prices for food crop would be above the government determined minimum price. However, if the maximum market price that he can get for his goods is below the minimum notified price, the Food Corporation of India will procure his produce at the notified price. Analogically this acts the same way as MNREGA wages acts as a minimum labour wage- theory being that a person receiving lesser price on the market would fare better by trading his exploits with the government which would provide him a better consideration. The procurement of food grains by the Food Corporation has often been criticised as a zero-benefit transaction which is almost entirely untrue. To sustain the largest public food distribution network in the world, a high volume of food is required absolutely and this is sustained by the food grain procuring activity of the government of India.[3] Thus, the MSP system has sought to tackle the twin problems of increasing agricultural wages and reduction in hunger. Grains procured by the government are also stored in government warehouses for emergency situations that have been known to arise in different parts of the vast country from time to time. There is also another hidden incentive for the government and farmers alike which is the adoption of new technology. Technology procurement can only be done if the mere sustenance of the farmer is guaranteed. A fair minimum price would seek to achieve exactly that which is beneficial both for the government and the producer in the most resource efficient utilisation of natural resources.
The CACP has called for making MSP a legal right which the government has clearly ignored. It had specifically mentioned how farmers in remote parts do not have access to regulated APMC markets and are therefore forced to sell their produce in the local mandis much below the MSP.[4] Validating the MSP by making it a legal instrument instils confidence among farmers, but also does theoretically assure minimum price to farmers thereby enhancing farm incomes, reducing debt, and minimising farm distress. In addition, raising MSP to three times the average cost of production, including imputed rent and interest on owned land and capital, is a noble idea meant to extend the protections already available. To this extent, the union legislation has failed to take into account the necessity for legalisation which has been interpreted as a precursor to the scrapping of the system itself as the recommendations had been made by the government’s own agencies and a wilful ignorance can only mean that cognizance although taken has not been acted upon which may be construed as laying down the groundwork for a possible removal of the MSP which has caused concerns.
Analysis
The primary issue and its stakeholders are farm incomes and farmers. At its core is the sluggish implementation of policy that is pernicious enough to cover almost all sectors of the Indian life. It must be stated at the outset that MSP does not extend to procurement of every crop and is restricted to twenty two crops.[5] For MSP to function as safety net and a security system as it is theoretically supposed to do, there must be a very robust system of procurement which should buy the produce on behalf of the government at MSP whenever market prices fall below support price for the crop, and farmer must be made completely aware of the MSP for the crops grown by him so that he can refuse to sell his produce at a price below MSP which would alleviate his income. As the NSSO data reveals, the percentage of farmers who are aware of the MSP at a crop level is an anaemic 17% for both Rabi and Kharif crops.[6] In a subsample considering the agrarian household as ‘aware’ of the MSP of at least one crop grown by them, the awareness remains around 28% for Rabi crops and 23.13% for Kharif crops.[7] Moreover, about 30% of farmers are not even aware of the agency that does procure grains. There is wide disparity about knowledge and procurement infrastructures among the states. Thus, although MSP is announced for the whole of India, the operation is restricted to the few states where designated government agencies can procure produce from the farmer. The State wise data testifies to this unfortunate fact as states like Punjab, Haryana, Uttar Pradesh, Telangana display increased awareness precisely because of the robust government machinery.[8] A disparity also exists in the nature of the crop as rice and wheat awareness and procuring is remarkably higher than pulses.
Thus, it can be stated that purely based on the awareness of farmers about the existence of such a thing as a Minimum Price for their crops or awareness of what the price actually is and whether or how they can choose the government alternative for receiving a fair price of their crops, scrapping the MSP would have no direct impact on the vast majority of farmer’s incomes in the country. Any impact would be indirect as the MSP does help in determining a ballpark figure of what the market rate should be which although not insignificant is hardly the primary purpose of the system. The safety net of the government is only effective if there is basic awareness of the existence of the mechanism as the first requirement. There is no enforcement mechanism in place in markets that would make the minimum price controlling effect of the MSP as a rooted entity. Farmers are regularly paid below the floor prices when ideally the market rates are supposed to be much higher than MSP as was the situation when supply did not exceed demand.[9] They do not have the means or the bargaining power which the MSP is supposed to provide to challenge the status quo when the supply for the MSP crops is in abundance.
What is more damning however, is the data analysing the question behind farmers with knowledge of MSP not getting it. Out of the meagre percentage of the farmers aware of the safety net that the MSP tries to be, 75% have not sold their produce to the procurement agencies. This would be a good sign if the market rates were, as contemplated in the 60s higher than the floor price that the MSP is. Thus, this would prima facie be an encouraging sign. However, further analysis of the NSSO data is revealing. The percentage of farmers who cited higher market rates than MSP as the primary cause of why they have not sold to the procuring agencies is a paltry 7.97% for rabi and 8.77% for kharif crops.[10] This is in sharp contrast to the nearly 25 per cent of farmers who reported that there was no procurement agency or local purchaser available to procure the produce at MSP when the farmer received lesser than MSP rates in the market. The benefit of MSP should ideally reach all farmers across all states, a dream for which, a well branched out and deep network of procurement agencies with required infrastructure is a necessity. This, for all practical purposes may not be feasible with current spending on agriculture. Government agencies are already facing difficulty in storage and maintenance, an expansion although desirable is redundant as capacity is simply unavailable. 66% of farmers have also mentioned that they have not sold to procurement agencies and have taken the lesser market prices for ‘other reasons’ primary of which is delay in payment by the procuring agencies. The procurement is also incredibly biased towards rice and wheat leaving other kinds of important crops quite literally high and dry.
This would seem to indicate that scrapping the MSP program would not in absolute numbers cause as much harm as has been foretold by pressure groups and political parties that supported the same measures as have been or can be undertaken by the government.[11] The money spent by the government in creating and maintaining warehouses and granaries, paying for other expenses etc can only be justified if the benefits both monetary and societal extend to a large percentage of the farming population. This is shown to not be the case as any drastic impact on farmer’s incomes at current government spending, reliance on government and awareness levels would be tepid and current supply levels of major crops.
An inefficiency thus gets in-built into production and farmers who can avail the MSP do not have to bother whether growing a particular crop on land unsuitable for its cultivation would raise cost of production. This is what has happened in the case of extension of rice cultivation to the semi-arid regions and sandy soils in states like Punjab and Haryana, which is creating a new host of natural resources problems in addition. The water table for example falls in these regions due to the massive requirement of irrigation to sustain paddy cultivation. Growth of other crops is thus ignored by the larger farmers who can afford to sell to procurement agencies and the detrimental effect to the natural resources of a region makes the job of the smaller farmer into transitioning from an MSP covered crop to other vegetables, pulses or spices much more difficult as the resources and technology available are severely compromised. It cannot be said that farmer incomes will both in the long and the short term not be affected by depletion of natural resources which are necessary in the farming process. Fixing MSPs based on cost of production primarily also neglects changes in society’s preference for a commodity which has several adverse implications. It can cause serious imbalances in what is being produced and what is required or demanded. It can hurt the consumer as has been the experience in the case of rice and wheat and would require the government to buy produce all the time and everywhere, which is simply impractical.
The one stop shop by the Indian state whenever there is rural demand distress has been centred around increasing the MSP without tightening the enforcement regime. However, raising the MSP may not always be an economically efficient way of helping farmers. It again, leads the farmer into believing that the demand of his produce is high which if the produce is rice or wheat among others, is simply not true. It does lead to a surplus of food grain stock with the Food Corporation of India.
It can keep farmers trapped in an ecologically unsustainable practice of cyclical cultivation of wheat and rice. There is an issue of equity too, as, the bigger the farmer, the larger is his produce and more will be the subsidy while the poorer farmer will remain cut off from this formalised system with his lack of access to knowledge and government procuring processes. When agricultural growth has plummeted though, raising the MSP is currently the only means of putting money into the rural sector. Direct cash transfers into bank accounts can be explored as an alternative method to achieve the same ends.
Thus, this would then seem like an inefficient form of market interference that has practically very little oversight or regulation. The primary historical reason for the creation of a minimum price- namely the lack of supply of food grains and incentivising adoption of HYV seed varieties among other irrigational innovations is eradicated due to the measures taken as displayed by the surplus in those exact grains especially rice and wheat which are surplus to the extent of being harmful to the government treasury to fund storage for. The remedy for price declines due to good harvest, namely- procurement by the government although available, is rarely exercised due to lack of coverage throughout India, illiteracy about the concept itself among the farmers, great costs in creating and maintaining storage bodies, inefficiency in procuring by agency, delay in remuneration should be a compelling enough reason to advocate for the removal of the MSP regime purely from a farmer income perspective. The only benefit that would seem to be the effect of the MSP in its current form is in determining the market price of certain goods which can be otherwise regulated by alternative means along with stringent enforcement that would not cost the exchequer as much. Cropping can then be done keeping demand of goods in mind and fetch a far better, more environmentally sustainable outcome which would actually increase farm income beyond the lip service accorded to the sector by the political parties.
Conclusion
In the past years, farmers had reportedly sold pulses, spices and coarse cereals at prices ruling 20 to 30 per cent lower. Thus, a strong case can be made for the MSP system to be again used as an incentivising and as an efficient safety net policy to boost production of vegetables, fruits, spices and other commodities in short supply and redirect the resources spent in producing staple grains into investment in value intensive goods. The Kerala government has adopted the inclusion of vegetables into the MSP system which is a step in the right direction.[12] The Madhya Pradesh and the Tamil Nadu government have displayed intent of doing the same. This, along with instant payment by the procuring agencies into the zero-balance bank account of the farmers would give teeth to the pre-existing system. Large scale farmer literacy and outreach is clearly necessary. In the 21st century, inability to communicate the basics of a policy that has existed since the 1960s by an entity as widespread and powerful as the Indian state machinery is simply not an acceptable excuse. If one is serious about continuing the MSP regime, large scale investments into storage facilities spanning every small village must be looked into. Local procuring agencies in larger numbers and dispersed strategically can be a viable alternative to government storages. Decentralized procurement agencies with local presence along with increased storage capacity or system of deficiency payments to bypass the need for procurement can extend the benefits of support prices to a larger segment of the farming community.
The system of ‘deficiency price payment’ can be a supplement or even a replacement for the MSP regime. In this system, there would not be a need for government to buy the unwanted quantity of goods. After announcement of the floor prices by the government and educating the farmer about the system along with stringer surveillance, farm produce can be traded in the free market. The prices would ideally be higher than floor prices. However, if there is any decrease in the market value and the farmer has to sell the goods at the lower prices, the government would pay the difference to the farmer. This would ensure that there is no regional or crop wise discrepancy and it does not depend on the efficiency of the procurement mechanism. It would cover all farmers and would not excessively incentivise larger farmers to only produce the goods that they properly get MSP for in larger states with efficient procuring. As it is also dependent on the demand from the market, it would reflect and notify the producer of the demand in goods so production will be influenced by demand. This system would in fact, be an easier executive function and complete the objectives of the MSP system in raising the income of farmers both qualitatively- in that receiving of the shortfall would be instant and quantitatively as access to the safety net would be universal and bereft of any extraneous circumstances.
The scrapping of the MSP without any alternative plans is indeed a dangerous possibility that cannot be ignored. The continued non conferment of a legislative basis of the same is contentious in the farm bills. However, it cannot be ignored that the MSP regime despite its noble intentions and past record is grossly inefficient and covers a very limited number of farmers with wide disparity both in crops and in states due to a multitude of factors. It is, as the author contends, in the farmer’s best temporary and long-term interests, a good idea to revamp the system so it responds better to the needs of the 21st Century Indian people before solidifying a pricing policy in legislation.
[1] The Wire, Bharat Bandh Against Farm Bills: All You Need to Know, September 25th 2020, available at — https://thewire.in/agriculture/explainer-agriculture-ordinances-farm-bills-farmers-protest-narendra-modi (Last visited on 31st October 2020)
[2] The Outlook, ‘Agricultural Mandis And MSP Will Continue,’ Reassures Prime Minister Modi, available at- https://www.outlookindia.com/website/story/india-news-agricultural-mandis-and-msp-will-continue-reassures-prime-minister-modi/360663 (Last visited on 31st October 2020)
[3] Bharath Kancharla, Explainer: What is the role of FCI in food grain procurement & food security?
May 30th 2020, available at- https://factly.in/explainer-what-is-the-role-of-fci-in-food-grain-procurement-food-security/#:~:text=The%20distribution%20is%20also%20done,and%20Roads%20are%20also%20used. (Last visited on 31st October 2020)
[4] Press Trust of India, CACP suggests new law ‘Right to Sell at MSP’ for farmers, 5th July 2018, available at- https://www.business-standard.com/article/pti-stories/cacp-suggests-new-law-right-to-sell-at-msp-for-farmers-118070501177_1.html (Last visited on 31st October 2020)
[5] Price Support Scheme, Operational guidelines, available at-http://agricoop.nic.in/sites/default/files/pssguidelines.pdf
[6] NSSO (National Sample Survey Office) (2015) Situation Assessment Survey of Agricultural Households: January–December 2013. NSS 70th Round (unit level data). Ministry of Statistics and Programme Implementation (MOSPI). Government of India
[7] id
[8] K.S. Aditya et al., Awareness about Minimum Support Price and Its Impact on diversification Decision of Farmers in India, Asia & the Pacific Policy Studies, vol. 4, no. 3, pp. 514–526 (2017) ¶ 518
[9] Economic Survey (2016) Agriculture: More from Less. Available at- https://www.indiabudget.gov.in/budget2016-2017/es2015-16/echapvol1-04.pdf (Last accessed on November 2nd 2020)
[10] K.S. Aditya et al., Awareness about Minimum Support Price and Its Impact on diversification Decision of Farmers in India, Asia & the Pacific Policy Studies, vol. 4, no. 3, pp. 514–526 (2017) ¶ 519
[11] Fatima Khan, How Congress is justifying its stance against farm bills after backing reforms last year, September 18th 2020, available at- https://theprint.in/politics/how-congress-is-justifying-its-stance-against-farm-bills-after-backing-reforms-last-year/505618/ (Last visited on November 2nd 2020)
[12] Livemint, Kerala first state in the country to fix MSP for vegetables: Pinarayi Vijayan, 28th October 2020, available at- https://www.livemint.com/politics/news/kerala-first-state-in-the-country-to-fix-msp-for-vegetables-pinarayi-vijayan-11603845925821.html (Last visited on November 2nd 2020)
