What is minimum support price (MSP) and does it really benefit farmers?

There is an ongoing debate on the government’s move of hiking the MSP to 50% over production cost and whether it will benefit farmers for real.

Sep 09, 2018 10:09 IST India Infoline News Service

There has been a great debate recently over minimum support price (MSP) for agricultural produce. Fresh talks have begun over the government’s move of hiking the MSP to 50% over production cost and whether it will benefit farmers. Let us look at whether the move makes sense given that it has always been one of the major demands in all of the farmer movements in the country.
 
What is MSP? How did it come into place?
 
It was in the early 1960s when India was facing an enormous shortage of cereals that new agricultural policies were born marking the start of the Green Revolution.
 
In 1964, the government set up the Food Corporation of India (FCI) to procure foodgrains from farmers at remunerative prices, and through the public distribution system distribute them to consumers and also  maintain buffer stock for food security.
 
In order to buy foodgrains, there had to be a policy on pricing. In 1965, an Agricultural Prices Commission was set up to advise on the pricing policy for agricultural commodities and its impact on the economy.

 
It was then that the Price Support Policy of the Government came in, providing a foolproof solution to agricultural producers against a sharp fall in farm prices. The minimum guaranteed prices are fixed to set a floor below which market prices cannot fall. If no one else buys it, the government will buy the stock at this minimum guaranteed prices. This is what came to be known as the minimum support price or MSP.
 
This policy took its final shape around 1974-76. 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.
 
MSP was introduced to provide financial stability to the agricultural system and encourage production.
 
MSPs are announced for 23 commodities on the basis of recommendations of the Commission for Agricultural Costs and Prices (CACP) by the Government of India at the beginning of the sowing season.
 
Why did MSP gain such importance in agricultural policies?
 
The major objectives of MSP are to support farmers from distress sales at severely low prices and to procure foodgrains for public distribution.
 
Ideally, the market price will always remain higher than the MSP fixed by the government. With government guarantee, the farmer can always sell at the MSP if he/she cannot procure a better price elsewhere.
 
Thus, MSP becomes a very important benchmark for the producer because it helps him estimate the revenue, aiding the financial planning and also influencing borrowing decisions if any.
 
Therefore, the demand to raise MSP has been one of the major points in most farmer protests given that it directly dictates the farmer’s income.
 
While there are many other non-price factors which have an long-term impact on agricultural development such as technology, irrigation, development of infrastructure, market reforms, better procurement, and storage facilities and institutions, MSP has always remained contentious as it is directly linked with the farmer’s pocket and is tangible.
 
Current Status of MSP: Pros, Cons & what can be done better?
 
The MSP just saw a 50% hike much to the relief of many farmers. The trouble with MSP is that while it is touted as an all-important factor for farmers promising an instant rise in their income and stability, it also has many drawbacks in implementation.
 
Pros of MSP:
 
It is a one-price policy guarenteeing assured pay, which directly influences farmer’s pockets. (Prices for all crops from 2009 to 2018.)
 
It considers various factors when fixing the price and does not leave the farmer at the mercy of the market.
 
Procurement for public distribution system and buffer stock for food security come from this policy.
 
It has a heavy influence on market prices and also helps the farmer grow production and match up with other sectors in terms of income.
 
Cons of MSP & what can be done better:
 
Hiking the MSP without investing in infrastructure is just a short-term play. While it does deliver immediate results, long-term developments to back-it up are also important.
 
MSP covers numerous costs such as the cost of sowing (A2) and labour (FL). These considerations are controversial with suggestions that it should be based on comprehensive costs (C2), which also include land rent costs.
 
Too much of a hike on MSP either paves way for inflationary effects on the economy, with a rise in prices of foodgrains and vegetables, or loss to government treasury if it decides to sell at a lower price as compared to the higher MSP it bought at.
 
MSP is a nationwide single price policy. However, the actual costing for production varies from place to place, more severely so in areas lacking irrigation facilities and infrastructure. Thus, not all farmers have equal benefits.
 
Market prices should ideally never be below MSP.  If they fall below the MSP, in concept, the farmer can always sell it to the government, which will then resell it or store as buffer. However, practically this does not always happen. The market value in many cases does fall below MSP due to lack of infrastructure and procurement apparatus on the government’s end.
 
MSP is notified for 23 crops, but effectively ensured only for two-three crops.
 
Thus, MSP while still being significant, is not the only go-to solution for solving all farmer woes.
 
The author, Sujay Ojha, is an Advisor to Weather Risk Management Services Pvt. Ltd. for agricultural production and technology related stories.

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