By Prof. Raj Kishore Panda in Bhubaneswar, January 23, 2022: Following the repeal of the three farm laws, the demand for legal guarantee of Minimum Support Price (MSP) from its present form of executive order has become louder by the protesting farmers’ unions. This has become a debatable issue among the intellectuals particularly the economists and agricultural scientists in the country.

Why are the farmer unions demanding legalization of the executive order when the central government continues with the MSP system, announces higher MSP of the selected crops and procures increasing quantities of grains year after year? No doubt the last year-long intense agitation by the farmers has forced the central government to repeal the three farm laws.

As such encouraged by their success in the agitation the farmers unions are demanding legal guarantee of the MSP to get rid of the apprehension against the government’s possible changes in agricultural pricing policy in future. Certainly the continuance of MSP as an important component of the agricultural price policy over the years without parliamentary approval tells about the political compulsion of the central government to continue with the policy. However, questions are now raised on its sustainability.

The economists and agricultural scientists argue that MSP is an inefficient and wasteful policy instrument. It is economically an unsustainable system. However, since the subject is quite sensitive and linked to the livelihood security of a sizeable section of our rural population, we have here focused on some of the emerging issues that have cropped up in the continuance of MSP over the years emphasizing the need for reformulating agricultural price support policy framework.

It is to be recollected that MSP was introduced into the agricultural pricing policy way back in 1960s when the country was witnessing severe shortage of foodstuffs, particularly cereals. During those years the New Agricultural Policy was born to make a start for Green Revolution in the country. Initially Food Corporation of India (FCI) used to procure food grains at MSP from surplus producing states such as the Punjab and Haryana.

But, with the overwhelming success of the green revolution across states there has been phenomenal rise in food grains production leading to increasing number of states coming under food grains surplus category in the country. This has caused significant rise in government’s MSP-based food grains procurement year after year leading to rise in accumulation of stocks in FCI go-downs.

As per recent available data, the total stock of food grains (rice and wheat) which stood at 534.29 lakh tones in June 2016 has gone up to 832.69 lakh tones in June 2019 and further to 832.69 lakh tones in June 2020. This stock is far more than operational and strategic stock (210.40 lakh tonnes) required for the country. With the growing food grains stocks the economic cost (consisting of procurement cost, storage cost and distribution cost ) has increased manifold.

For 2021-22 the government’s estimate of economic cost of a quintal of wheat sold comes to Rs2994/- while its MSP with pooled cost is Rs3896/-. For rice the same is Rs 4294/- and Rs 4730/- respectively. This indicates that the MSP is not a prudence course to be followed in the food grains procurement.

Secondly, MSP system can be sustainable only if whatever grains government buys is sold or distributed among the people in the country. One of the ideas behind the introduction of MSP was to provide food grains to the consumers identified under Public Distribution System ( PDS) and to the weaker sections at subsidized prices. However, over the years significant changes have taken place in the PDS system in the country.

In 1997 the universal PDS was changed into a targeted PDS introducing APL and BPL categories keeping the issue prices higher for the APL category. This resulted in APL category of households demanding less food grains through PDS as market price of food grains for them remains lower than the rates offered by the PDS outlets. In 2013 the National Food Security Act was passed making citizens’ access to food grains as a right.

Under the provisions of the Act, 75% rural population and 50% urban population are entitled for accessing subsidized food grains under Targeted PDS. All these structural changes in PDS have resulted in less off-take of food grains from PDS as food grains prices in the market remains lower than PDS prices.

Thus while there has been consistent increase in MSP–based procurement in the country, the food grains procured are not absorbed in the domestic market (inclusive of PDS). Thus, a situation has developed in which the country suffers from problem of plenty due to hike in MSP each year. The worst part of this is annually there is huge wastage of food grains in the country.

Studies in this context reveal that government intervention through MSP distorts the logic of supply-demand mechanism, slows down the process of diversification and ultimately becomes economically a very expensive and inefficient policy instrument. The determination of MSP each year by the government has certainly alienated the market forces and its players determining the prices of food grains in the country.

Besides, the Government’s procurement pattern – increasing bias towards paddy and wheat has led to a highly distorted incentive structure for the farmers in favour of paddy and wheat cultivation neglecting crop diversification. A study by NABARD and ICRIER 2018 has reported that the present MSP system hinders crop diversification in the country. More over as often argued, MSP cannot augment the incomes of small and marginal farmers. These farm households are net buyers of food grains. The income of these farmers can be enhanced if they move to high-value agriculture which in its turn demands strengthening rural infrastructure and supply chain in the country.

Since the MSP is supposed to be an adhoc mechanism determining the prices of food grains devoid of free play of market forces it cannot be economically viable and sustainable and in the long run this will affect growth of agriculture sector in general and crop sub-sector in particular. This suggests for re-formulating agricultural price support policy framework. Taking into account the demand of the farmer unions the Government has agreed to constitute a committee on MSP. Hopefully the committee will take a holistic view of the issue before arriving at a suitable alternative to MSP.

Subsidization of agriculture may seem bad economics but it is a reality across the world–a status quo which is unlikely to change in near future. In case of India with a large majority of marginal and small holders in the agriculture sector there is a need to support these farmers in other forms. Farmers whose produce does not qualify for MSP need to be taken care of.

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