At the time of independence, India was staring at a major deficit in terms of cereal production. After struggling for the first decade, the government decided to go for extensive agricultural reforms. Of all the development programmes introduced during the post-independence period, the ‘Green Revolution’ during the late 1960s is considered an outstanding achievement. The expression ‘Green Revolution’ was deliberately coined to contrast it with the phrase ‘Red Revolution.’ It carried the conviction that agriculture was being peacefully transformed through the quiet working of science and technology, reaping the economic gains of modernisation while avoiding the social costs of mass upheaval and disorder associated with rapid change. The green revolution led to a substantial increase in agricultural output, to the extent that it almost solved India’s food problem.
If the government pricing policy is unfair, then the community can never thrive. Demand and supply curves for any agricultural commodity show that as the price of the commodity declines, the demand for that commodity rises and the supply falls. If the market is left free, with no government intervention, the price will settle at a point which is referred to as the ‘free market equilibrium price’ where demand equals to supply. At one price farmers get too low a recompense for their labour, while another may be too high for the poor households. Policy makers grappled with both these perceptions and they called for some carefully scripted government action.
Keeping in mind the interests of farmers, one method that has been used in India is to announce a Minimum Support Price (MSP) for the commodity in question. It was used for the first time in 1966-67 when the MSP was declared only for wheat at Rs. 54 per quintal. Since then, it has been an integral part of India’s agricultural policy. Presently, the MSP has been announced by the government India for as many as 23 crops at the beginning of each season viz. rabi and kharif.
MSP is a form of market intervention by the government of India to insure agricultural produces against any sharp fall in farm prices. The major objectives are to support the farmers from distress sales and to procure food grain at MSP for the Public Distribution System. In case the market price for any commodity falls below the assured MSP due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at MSP. Thus, MSP serves as a ‘safety-net’ for farmers. The MSP of any crop is fixed by the government after taking into account: (1) Recommendations of the Commission for Agricultural Costs and Prices (CACP); (2) views of State governments; (3) views of concerned Ministries, and (4) other relevant factors.
The CACP submits its recommendations to the government separately for five groups of commodities namely kharif crops, rabi crops, sugarcane, raw jute and copra. Currently, MSP for 23 crops as recommended by CACP consists of seven cereals (paddy, wheat, maize, sorghum, pearl millet, barley and ragi), five pulses (gram, tur, moong, urad and lentil), seven oil seeds (groundnut, rapeseed-mustard, sesamum, sunflower, safflower, Niger seed) and four commercial crops (sugarcane, copra, cotton, raw jute). But it is seen that despite MSP for agricultural produce, the agrarian distress is not relieved. This is mainly because the declared MSP is not generating sufficient returns on costs incurred by farmers.
As a ramification of low prices of farm produce in the open market, the agrarian distress gets intensified, and it is visible through escalating farmer indebtedness and suicides. Therefore, for the overall sustainability of farming, it becomes even more crucial to strengthen MSP and extend its reach to all farmers and all crops. For MSP to be remunerative, farmers across the country have been demanding since 2006 the fixation of MSP as per M S Swaminathan’s formula.
The Swaminathan report recommended that the MSP should be computed by incorporating almost all actual farm costs as C2 along with an additional 50 per cent margin over it. The then Finance Minister, in the Union Budget for FY 2018-19, had announced the proposal to hike the MSP of the upcoming kharif crop at a level that was 50 per cent higher than the cost of production. The proposal was hailed as a ‘historic’ step towards doubling the famers’ income as promised in the earlier budget. But during calculation, government used the formula A2+FL (paid out costs plus imputed wage of family labour) and 50 per cent margin on it. Such calculation barely brought about an increment in farmer’s income. Indeed, the use of the term ‘historic’ has rendered the farmers delusory. The proposed MSP formula of Swaminathan is C2 (comprehensive cost including imputed rent and interest on owned land and capital) plus 50 per cent . As C2 is greater A2+FL, Swaminathan’s formula seems to be a better approach towards providing farmers with the deservedly higher value for their produce.
MSP can have an impact on the country’s economy. But there are serious disadvantages of a high MSP.
(1) MSPs have unequal access: The benefits of MSP do not reach all farmers and for all crops. There are many regions of the country like the northeastern region where the implementation is too weak. The Shanta Kumar Committee report asserts that only six per cent of all farmers have benefitted from MSP and around 94 per cent farmers are dependent on private markets.
(2) Excess procurement and storage: Every year Central and state governments announce the crops that will be purchased at MSP. Though MSPs have been declared for as many as 23 commodities, in practice, the governments – both Union and some State governments- procure food grain – mainly rice and wheat – at MSP for distribution through Public Distribution System (PDS), Integrated Child Development Services (ICDS), Mid-Day Meal Scheme (MDMS) and other welfare schemes under the National Food Security Act, 2013. Since procurement is open-ended, buffer stocks continue to increase. About two-thirds of the total cereal production is taken through procurement operation leaving only a third for open market. This has created shortage of crop produce in the open market which has a serious impact on consumption patterns. Thus, government becomes the biggest hoarder of food, thanks to the annual ratcheting up of MSP. The rise in stock means rise in storage cost, loss due to deterioration in quality and consequential rise of food subsidy.
(3) Market distortion: Huge procurement at MSP distorts the free market. It favours some crops over others. A survey by the Center for the Advanced Study of India, University of Pennsylvania, US, found that procurement by government agencies at MSP invariably resulted in a significant increase in the prices of produce. Higher MSPs over-incentivize Indian farm goods leading to supply glut. Hikes in MSP also adversely affect the exports. MSP does not cover perishables.
(4) Ecological problem : MSPs lead to non-specific agricultural practices whereby the soil and water are stressed to lead to degrading ground water table and salination of soils. The case of Punjab can be mentioned. Close to 95 per cent of farmers in Punjab sell rice and wheat at MSP under the Government’s Procurement system. In the 1960s, Punjab had cropping intensity of 126 per cent, which has now increased to 200 per cent at the cost of ecology.
(5) Inflation: In its annual report (2017-18) Reserve Bank of India says that MSP of crops has a major impact on inflation. The adverse impact of higher MSP on rising food prices for poor people is often explained as the rationale behind keeping MSP low.
(6) Issues with WTO: India’s MSP scheme for many crops has bene challenged by many countries in the WTO. If the current trend of increasing MSP continues, the country will face international criticism for breaching the 10 per cent norm for subsidy on farm produce set by the WTO.
MSP is the main point of contention in the three much-debated new farm laws. The agitating farmers fear the discontinuation of MSP. Such apprehensions are not hypothetical. The new agricultural policy – defined by the new farm laws – is laying a foundation for an environment wherein the MSP and PPS (public procurement system) are likely to become redundant.
There is no doubt that the MSP regime is beleaguered by issues related to adequacy and effectiveness. Indeed, MSP is not necessarily a panacea for problems that plague Indian agriculture. We need to look beyond MSP. Significantly, certain long term and fundamental reforms of agriculture were recommended in 2004-06. To arrest the decline, farmers must be given productive assets, like education, appropriate skills, infrastructures and economic activities. Our distressed farmers need an enabling environment and scope to grow. In the word of Amit Kalantri, ‘A farmer is a magician who produces money from the mud.’