Minimum Support Price (MSP)- What is it and how does it affect the farmers?

On 4th July, the Narendra Modi Government announced substantial increases in the Minimum Support Price (MSP) for Kharif crops. This hike was promised in the Union Budget 2018.

As per the Union Budget, the MSP of the Kharif crops was fixed at 1.5 times the estimated cost of production. The recent announcement by the Government is supposed to comply with it.

Minimum Support Price (MSP) is the price at which the Government purchases crops from the farmers. (Sometimes the purchase price can be more than the MSP. The MSP basically serves as a floor price to provide guaranteed minimum prices to farmers)

The Commission for Agricultural Costs and Prices (CACP) recommends the MSP for 23 crops (14 Kharif crops, 6 rabi crops as well as sugarcane, jute and copra) before the commencement of the sowing season. The Food Corporation of India (FCI), state agencies and co-operatives procures crops from the farmers to ensure the implementation of the MSP scheme.

The MSP was increased to improve farm incomes and alleviate rural distress.

[A scheme similar to the MSP is the Market Intervention Scheme (MIS), under which the state government procures perishable commodities like vegetables.]

Impact of the increase in Minimum Support Price:

• Efficacy of MSP is limited: The actual Government procurement of crops is limited to wheat, paddy and cotton. That too in a few states. Therefore, the MSP is not effective in providing assured income to farmers.
• Only rich farmers will benefit. Farmers owning up to 1 hectare of land constitute 69.4% of total agricultural households. These small farmers are perpetually in debt. Many rely on moneylenders, rich farmers and landlords to advance them the money needed for cultivation and they are often forced to sell their produce to these financiers at lower than market prices. In short, 69.4 % of farming households are unlikely to be beneficiaries of the MSP hike. It is the rural rich who will get the benefit from higher MSPs.
• Inflationary: It has the potential to push up inflation through higher food prices if implemented properly. Higher inflation will not only hurt the purchasing power of the poor, it will also prompt the RBI to increase interest rates in the economy.
• Increase fiscal deficit: It will put pressure on the Government’s finances due to increased subsidy burden.
• Skewed incentives: The MSP scheme distorts cropping decisions. The farmers do not take into account factors like productivity, demand etc. to decide what to produce. The MSP leads to higher production of crops with the higher price. For eg- The production of rice in Punjab takes thrice the amount of water used by farmers in Bihar. Yet, rice is produced in abundance in Punjab due to the Government procurement policy. It has led to depletion of water tables.
• MSP is not compliant with MA Swaminathan’s recommendation: There are three definitions of agricultural costs. A2 costs cover all paid-out expenses on seeds, fertilisers, chemicals, hired labour, fuel, irrigation, etc. A2+FL cover paid-out expenses plus an imputed value of family labour. C2 cost is the most comprehensive cost which covers the imputed value of rent on owned land and interest on capital as well. MS Swaminathan’s recommendation is to fix MSP at 1.5 times the C2, but the Government has used A2 + FL as the reference.
• The Commission for Agricultural Costs and Prices (CACP) will become irrelevant: The CACP considers various factors like the cost of production, demand & supply condition, price trends in the domestic and international market, inter-crop parity etc. to recommend prices. Since the price will be determined only through the estimation of the cost of production, CACP will become irrelevant

That’s all. The minimum support price is an inefficient tool to address rural distress. We need structural reforms in the farm sector to improve rural incomes.

Also read: Is Farm loan waiver a good idea?