Model Answer

Introduction

The Minimum Support Price (MSP) is a policy tool introduced in India to ensure farmers receive a fair price for their crops, irrespective of market fluctuations. Announced by the government before each sowing season, MSP serves as a price floor to prevent distress sales and support farmers’ income. However, the current status of MSP and the ongoing debate about its legal backing raise questions about its effectiveness and reach.

Current Status of MSP in India

• MSP Coverage: Currently, MSP is announced for 22 crops, including staple grains like wheat and rice, pulses, oilseeds, and some commercial crops. However, procurement is mainly focused on wheat and rice, while other crops see limited purchases.
• Limited Beneficiaries: Although MSP is a national policy, only a small fraction of farmers, mainly those in states like Punjab, Haryana, and Madhya Pradesh, benefit from it. This is because procurement centers and infrastructure are more concentrated in these regions, making it difficult for farmers in other states to access MSP.
  • Example: In the 2021-22 procurement season, around 42% of wheat farmers in Punjab sold their produce at MSP, compared to only 5-6% in states like Bihar and Odisha.
• Dependence on Procurement Agencies: MSP functions well where procurement agencies actively purchase crops. In many regions, farmers still rely on local traders, who may not offer MSP rates.
• Price Stability: MSP has helped maintain price stability for key staples like wheat and rice, thus providing some income assurance to farmers. However, the lack of MSP implementation for other crops leaves many farmers vulnerable to price volatility.

Role of MSP in Securing Farmers’ Income

• Income Assurance: MSP gives farmers a guaranteed price, which cushions them against market price drops. For crops like wheat and rice, the MSP system has largely contributed to income stability for farmers.
  • Illustration: A farmer in Haryana, growing wheat, can confidently sell his crop to a government procurement center at the MSP of ₹2,125 per quintal (as per the 2023-24 season), even if the market price falls to ₹1,800 per quintal.
• Market Intervention: During times of bumper harvests or low market prices, MSP acts as a safeguard against farmers having to sell their produce at a loss.
  • Example: In 2020, despite a significant drop in market prices due to the COVID-19 lockdown, government procurement under MSP prevented large-scale distress sales of wheat and rice.
• Encouraging Production: MSP has incentivized the production of certain crops, particularly wheat and rice, contributing to food security through the Public Distribution System (PDS).

Challenges with MSP

• Limited Reach: MSP benefits a small portion of farmers. Most small and marginal farmers, tenant farmers, and those growing non-MSP crops remain excluded.
• Over-reliance on Wheat and Rice: The focus on wheat and rice has led to skewed cropping patterns, reducing the cultivation of pulses, oilseeds, and coarse grains, which are crucial for crop diversification and soil health.
• Fiscal Strain: Large-scale procurement at MSP, especially for wheat and rice, strains the government’s fiscal resources and has led to excess stockpiling.

Does Legal Backing for MSP Guarantee Financial Sustainability

While legal backing for MSP is a popular demand, it alone may not guarantee financial sustainability for all farmers. There are several reasons why:

• Structural Issues: Legal backing might ensure that farmers are entitled to MSP, but without adequate procurement infrastructure, particularly in remote and underdeveloped areas, many farmers will still struggle to sell at the MSP.
  • Illustration: Even if MSP is legally mandated, a farmer in Bihar growing pulses may find it difficult to sell his produce at the MSP due to the lack of procurement centers or storage facilities nearby.
• Diverse Crops and Regional Differences: Not all crops are covered under MSP, and giving MSP legal status may not address the diverse challenges faced by farmers growing horticultural crops, fruits, and vegetables.
• Market Reforms Needed: Legal MSP alone does not address the need for broader agricultural market reforms, such as better market access, improved storage, and processing facilities, and more efficient supply chains.
  • Example: Without better market linkages and storage facilities, farmers selling perishables like onions or tomatoes could still face significant losses, regardless of MSP.
• Investment in Infrastructure: A legal MSP may not be effective without investment in rural infrastructure, including roads, cold storage, and better access to markets.

Way Forward

• Diversification of Procurement: Expanding MSP to other crops and regions, along with setting up procurement centers in less developed areas, can enhance its effectiveness.
• Strengthening Market Infrastructure: Alongside legal backing for MSP, there should be a focus on improving market infrastructure, warehousing, and transportation to ensure farmers can access the benefits of MSP.
• Agri-reforms: MSP needs to be complemented by reforms in agricultural marketing, including the promotion of Farmer Producer Organizations (FPOs) and the introduction of digital trading platforms like e-NAM.
• Income Support Schemes: Combining MSP with direct income support schemes like PM-KISAN and crop insurance can provide a more comprehensive safety net for farmers

Model Answer

Minimum Support Prices (MSPs) are set twice a year based on the recommendations of the Commission for Agricultural Costs and Prices (CACP) and are approved by the Cabinet Committee on Economic Affairs. The CACP considers the following costs when recommending MSPs:

1. A2 Costs: These cover all direct expenses such as seeds, fertilizers, labor, and fuel.
2. A2+FL Costs: This includes A2 plus the imputed value of unpaid family labor.
3. C2 Costs: A more comprehensive cost, which includes A2+FL along with the cost of renting land or the interest foregone on owned land and capital assets.

CACP uses both A2+FL and C2 costs while recommending MSPs, although primarily A2+FL is considered when determining the minimum price for farmers. C2 costs are used to benchmark MSP recommendations to ensure that at least these costs are covered in major producing states.

Challenges with the MSP Regime

1. Limited Reach: Less than 6% of agricultural households benefit directly from MSPs. In 2019-20, three states—Punjab, Haryana, and Madhya Pradesh—accounted for 85% of wheat procurement, limiting the MSP’s effectiveness nationwide (Source: Government Reports).
2. Distortion of Cropping Patterns: The MSP system favors crops like rice and wheat, which has led to the neglect of crops such as millets, oilseeds, and vegetables. This is particularly detrimental for rainfed farmers who grow these crops, and it has increased India’s dependence on food imports (Source: Agriculture Surveys).
3. Procurement Challenges: The centralized procurement and storage system add significant overhead costs and result in high grain wastage due to inadequate storage facilities (Source: CAG Reports).
4. Ecological Impact: The MSP regime encourages the excessive use of chemical inputs and monocultures, which harms soil health, reduces groundwater levels, and leads to ecological problems like salinity (Source: Environmental Studies).
5. Fiscal Burden: The food subsidy bill, which accounted for nearly 30% of the central government’s net tax revenue in 2020-21, puts a significant strain on government finances (Source: Budget Reports).

To address these issues, India needs to diversify its procurement system, adopt better area planning, and consider legalizing MSPs to make it more inclusive and sustainable.