Minimum Support Price
Rulers or governments since ancient times have attempted to regulate prices to set either above or below the market equilibrium. The setting of floor price is a process to prohibit prices from going down a minimum value and creating a surplus. However, such measures have resulted in consequences that were never intended nor desired. This article attempts to understand Minimum Support Price and its consequences.
Beginning
In the aftermath of food scarcity due to drought, floods, and international price fluctuations during the 1950s and 60s Minimum Support Price (MSP) was introduced in 1966–67 as a form of market intervention by the Government of India.
The major objectives were
· To encourage farmers to grow wheat and rice which were not preferred due to the labor-intensive and non-lucrative nature.
· To help farmers earn a higher income and act as a safety net from uncertainties of the market and nature, or sell in distress
· It acted as a way to control the sharp fluctuation of prices of agricultural produce.
· The government procured the food-grains and sold them to people below the poverty line at fair price shops below prevailing market rates.
Process
The setting of MSP was an agricultural price policy that was initially introduced for wheat but now comprises 23 farm crops — 7 kinds of cereal, 5 pulses, 7 oilseeds, and 4 commercial crops. It is an administrative mechanism that was passed as an executive order but there is no law on MSP.
The Commission for Agricultural Costs (CACP) recommends MSP and is announced by Cabinet Committee on Economic Affairs (CCEA). It is announced twice a year before every crop cycle — during Rabi and Kharif crop season. The CACP takes into consideration a lot of factors that include a comprehensive view of the entire structure of the economy of a crop or group of crops to arrive at the MSP. The Commission also makes use of both micro-level data and aggregates at the level of district, state, and the country.
The government procures surplus produce in select states and districts through the Food Corporation of India (FCI) and releases it for sale through the Public Distribution System PDS.
The impact
The focus was on farmers of Punjab, Haryana, and western Uttar Pradesh and worked very well during the 1970s and 80s. The implementation led to surplus production of wheat and paddy what is now called Green Revolution. The farmers in these areas reaped the benefits and became quite rich.
The unintended consequences.
· MSP could impact only about 5% of the farmers in the country while 95% of them functioned outside its purview due to either lack of awareness or small farm holdings that made commercial farming unfeasible or distance from recognized mandis which made transportation of their produce unfeasible, etc. The big farmers with large landholding benefitted from MSP more than they need while the poor ones are still struggling.
· The government sold the procured grains through the PDS system to poor people of other states, at less than the market price, resulting in the local farmers being unable to fetch a good price for their produce.
· Farmers in the Green-Revolution belt became heavily dependent on chemical fertilizers and pesticides leading to degradation of the soil and contamination of the water. This also impacted the health leading to the occurrence of cancer among a large section of the local population. Groundwater levels went down due to excessive drawing of water to cultivate water-intensive crops in areas that were rainfall-deficient. To get the benefit of MSP farmers produced only a few varieties of crops leading to a lack of local biodiversity.
· In case of a bumper crop the government brought all the produce and had to bear a heavy cost in its transportation and storage. Due to a lack of sufficient storage facilities, there was huge spoilage and loss.
· MSP in fact became the maximum price that farmers got. Buyers were not willing to pay more than the MSP.
Conclusion
Even though MSP was implemented to increase the production of some important crops as well as the income of farmers and was met to some extent, the negative consequences make us question its effectiveness in the long run.
References
· Downtoearth.org.in. 2022. The minimum support price conundrum and Indian farming. [online] Available at: https://www.downtoearth.org.in/blog/agriculture/the-minimum-support-price-conundrum-and-indian-farming-75115
· Niti.gov.in. 2022. [online] Available at: https://www.niti.gov.in/planningcommission.gov.in/docs/reports/sereport/ser/ser_msp.pdf
· Karamchandani, S., 2022. The Unintended: How the MSP regime induces market failures in India. [online] Indiaunabridged.substack.com. Available at: https://indiaunabridged.substack.com/p/the-unintended-how-the-msp-regime
