MSP: Price Floors and Unintended Consequences
The Minimum Support Price (MSP) was introduced with the intention to make farmers adopt technology with the goal of increasing productivity of agricultural lands in the 1960s.
India had just become a republic and had faced droughts and the resulting famine during the same time. MSP was an incentive for the farmers to grow food crops — wheat and paddy — that were labour intensive but didn’t fetch lucrative prices.
MSP was also a safety net given to the farmers to ensure guaranteed prices and assured markets. The MSP-based procurement system is aimed to save the crops from price fluctuations due to various unwarranted factors such as the monsoon, lack of market integration, information asymmetry and other elements of market imperfection plaguing Indian agriculture.1
MSP is advised by the Commission for Agricultural Costs and Prices (CACP) and set by the Government of India. While the CACP arrives at MSP by factoring in cost of production and family labour, it is left to the government to set up and announce the MSP. Government can sometimes set-up the MSP above the CACP advised price.
On the ground, Food Corporation of India and other state government agencies undertake procurement of wheat and paddy. State government agencies procure coarse grains as per directions issued by the government of India.2
MSP managed to move a substantial number of farmers into high productivity agriculture. And, India became better at feeding its population.
However, this self-sufficiency came at the cost of inter-regional and inter-generational disparities and inequities — a few areas (Punjab, Haryana) have benefited disproportionately and this is visible in their incomes — Haryana has monthly average income of 14,434/- whereas West Bengal and Bihar vary from 3,558/- to 3,980/-.3 There has also been inequitable use of water in these areas.
Since the MSP was extended and now covers 23 crops, farmers have been incentivised to focus more on these as they have income assurance. This has led to decreased focus on diversification and a resultant shortage of pulses and edible oils.
Though MSP has been in practice since the last 5–6 decades, it has never been legislated and it becomes a tool in the hands of the government to influence the electorate. Especially since it is announced before the sowing season and may be used as a political tool before the elections.
Even though the MSP is seen as a support to the farming fraternity, the number of farmers taking advantage of this is not so high. Only 23.7 per cent of total paddy produced was sold under MSP in Kharif season (July 2018-December 2018); it was 24.7 per cent in Rabi season (January 2019 to June 2019). Paddy and wheat are the two major crops procured by the government at MSP; but even their output sold under the assured price was less.4
Among other crops, only 17.8 percent cotton in Rabi and 7.8 per cent in Kharif was sold under MSP. This figure was much lower for jowar (0.5–2.9 per cent), bajra (2.5 per cent) and maize (4–5.8 per cent). Three states — Punjab, Haryana and Andhra Pradesh, account for more than 50 per cent of the total rice procurement in the country. Ironically, West Bengal and Uttar Pradesh, the top two rice-producing states, account for less than 10 percent of the total procurement.5
MSP was designed to secure food for all Indians and protect farmers’ incomes. Between these two goals, the MSP has done better on securing farmers’ income. The MSP may have been a solution for its times (1960s and 70s). India was in a different condition then. Markets in India were not so mature and farmers could have been left in the lurch had they followed the high yield variety farming without MSP. Now, the markets are much more open & mature and will reward farmers for producing more.
India now needs to rethink MSP from a food security standpoint and redesign all the policy tools to suit the current needs of the country.
India now needs to rethink MSP from a food security standpoint and redesign all the policy tools to suit the current needs of the country. In rehaul of policy instruments, markets need to be seen as mature partners in development rather than adversaries who might harass the farmer for producing more and MSP should undergo changes to let markets play a major role and let governments step in only in case of market failures.
References:
- Sharma, Unnati. “What’s MSP and how is it determined? The issue at the heart of farm protests.” theprint.in. https://theprint.in/theprint-essential/whats-msp-and-how-is-it-determined-the-issue-at-the-heart-of-farm-protests/562172/ (accessed March 12, 2022).
2. https://fci.gov.in/procurements.php
3. Sharma, Samrat. “https://www.financialexpress.com/economy/in-these-6-states-farmer-families-live-on-less-than-rs-5000-per-month/1645832/.” financialexpress.com. https://www.financialexpress.com/economy/in-these-6-states-farmer-families-live-on-less-than-rs-5000-per-month/1645832/ (accessed March 12, 2022).
4. , Shagun. “Most farmers did not know of agencies that procured crop under MSP: Report.” downtoearth.org.in. https://www.downtoearth.org.in/news/agriculture/most-farmers-did-not-know-of-agencies-that-procured-crop-under-msp-report-79017 (accessed March 12, 2022).
5. Acharya, Namrata. “Punjab, Haryana and Andhra Pradesh corner 50% MSP rice procurement .” business-standard.com. https://www.business-standard.com/article/economy-policy/punjab-haryana-and-andhra-pradesh-corner-50-msp-rice-procurement-118070600243_1.html (accessed March 12, 2022).
