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What will a legal guarantee of MSP involve?


After a year-long agitation on the borders of Delhi, protesting farm unions are pushing for their other major demand for providing a legal guarantee that all farmers will receive remunerative prices for all their crops.


GS-III: Agriculture (Agriculture Pricing), GS-II: Governance (Government Policies & Interventions, Issues arising out of the design and implementation of policies)

Dimensions of the Article:

  1. How many crops does the minimum support price cover?
  2. About the prevalent backing for MSP
  3. What would be the fiscal cost of making the MSP legally binding?
  4. What is the Government’s position?
  5. About the success of states guaranteeing MSP rates

Click Here to read more about Minimum Support Price (MSP), its need and issues

How many crops does the minimum support price cover?

  • The Central Government sets a minimum support price (MSP) for 23 crops every year, based on a formula of one-and-a-half times production costs.
  • This takes into account both paid-out costs (A2) such as seeds, fertilizers, pesticides, fuel, irrigation, hired workers and leased-in land, as well as the imputed value of unpaid family labour (FL).
  • Farm unions are demanding that a comprehensive cost calculation (C2) must also include capital assets and the rentals and interest forgone on owned land as recommended by the National Commission for Farmers.

About the prevalent backing for MSP

  • There is currently no statutory backing for these prices, nor any law mandating their enforcement.
  • The government only procures about a third of wheat and rice crops at MSP rates (of which half is bought in Punjab and Haryana alone), and 10%-20% of select pulses and oilseeds.
  • According to the Shanta Kumar Committee’s 2015 report, only 6% of the farm households sell wheat and rice to the government at MSP rates. However, such procurement has been growing in the last few years, which can also help boost the floor price for private transactions.

What would be the fiscal cost of making the MSP legally binding?

  • The MSP value of the total output of all the 23 notified crops worked out to about Rs 11.9 lakh crore in 2020-21. But this entire produce wouldn’t have got marketed.
  • The marketed surplus ratio – what remains after retention by farmers for self-consumption, seed and feeding of animals – is estimated to range from below 50% for ragi and 65-70% for bajra (pearl-millet) and jowar (sorghum), to 75-85% for wheat, paddy and sugarcane, 90%-plus for most pulses and 95-100% for cotton, soyabean, sunflower and jute. Taking an average of 75% yields a number – the MSP value of production actually sold by farmers – just under Rs 9 lakh crore.
  • All in all, then, the MSP is already being enforced, directly or through fiat, on roughly Rs 3.8 lakh crore worth of produce. Providing legal guarantee for the entire marketable surplus of the 23 MSP crops would mean covering another Rs 5 lakh crore or so.
    1. The crop that is bought by the government also gets sold, with the revenues from that partly offsetting the expenditures from MSP procurement.
    2. Secondly, government agencies needn’t buy every single grain coming in to the mandis. Mopping up even a quarter of market arrivals is often enough to lift prices above MSPs in most crops.

What is the Government’s position?

  • While announcing the decision to repeal the farm laws, the Prime Minister announced the formation of a committee to make MSP more transparent, as well as to change crop patterns — often determined by MSP and procurement — and to promote zero budget agriculture which would reduce the cost of production but may also hit yields.
  • The panel will have representatives from farm groups as well as from the State and Central Governments, along with agricultural scientists and economists.
  • Both the Prime Minister and the Agriculture Minister have previously assured Parliament that the MSP regime is here to stay, even while dismissing any need for statutory backing.

About the success of states guaranteeing MSP rates

  • A policy paper by NITI Aayog’s agricultural economist Ramesh Chand, which is often quoted by Agriculture Ministry officials, argues, “Economic theory as well as experience indicates that the price level that is not supported by demand and supply cannot be sustained through legal means.”
  • It suggests that the States are free to guarantee MSP rates if they wish, but also offers two failed examples of such a policy.
  • One is in the sugar sector, where private mills are mandated to buy cane from farmers at prices set by the Government. Faced with low sugar prices, high surplus stock and low liquidity, mills failed to make full payments to farmers, resulting in an accumulation of thousands of crores worth of dues pending for years.
  • The other example is a 2018 amendment to the Maharashtra law penalising traders with hefty fines and jail terms if they bought crops at rates lower than MSP. “As open market prices were lower than the (legalised) MSP levels declared by the State, the buyers withdrew from the market and farmers had to suffer,” says the paper, noting that the move was soon abandoned.

-Source: The Hindu

December 2023