Centre Rules out MSP Law

The ongoing farmer protests in India have once again brought the issue of Minimum Support Price (MSP) to the forefront. As farmers take to the streets demanding legal guarantees for MSP, the government faces a delicate balancing act.

What Is MSP?

• Minimum Support Price (MSP) is the price set by the government at which it directly purchases agricultural products from farmers if the open market prices fall below this threshold.
• The primary purpose of MSP is to protect farmers against drastic price fluctuations during market volatility.
• It ensures a safety net for farmers, especially during bumper production years.
• It covers 22 crops, including paddy, wheat, maize, arhar (pigeon pea), cotton, and mustard seeds and Fair and Remunerative Price for sugarcane.

• The MSP is recommended by the Commission for Agricultural Costs and Prices (CACP) based on various factors:
  • Cost of Production: The CACP considers the cost incurred by farmers in cultivating a crop, including expenses on seeds, fertilizers, labor, and machinery.
  • Demand and Supply: The availability of a particular crop in the market influences its MSP. If there’s excess supply, the MSP may be adjusted accordingly.
  • Price Trends: Domestic and international price trends impact the MSP. The government aims to provide a price that covers production costs and ensures a reasonable profit for farmers.
  • Terms of Trade: The balance between agricultural and non-agricultural sectors affects the MSP. The government strives to maintain a fair exchange between these sectors.
• Significance of MSP
  • Income Security: MSP assures farmers a minimum income for their produce. It encourages them to invest in agriculture without fear of losses.
  • Market Stability: By setting a floor price, MSP prevents drastic fluctuations in crop prices. This stability benefits both farmers and consumers.
  • Food Security: MSP ensures adequate food production. It incentivizes farmers to grow essential crops like wheat, rice, and pulses.

The Swaminathan Commission’s Recommendation

• The MS Swaminathan Commission, in its report, recommended that the government should raise the MSP to at least 50% more than the weighted average cost of production (C2+ 50% formula).
• This formula includes the imputed cost of capital and land rent, providing farmers with a fair return on their investment.

Earlier Events

Committee Formation: Over two years ago, during the previous farmer protests against the three contentious farm laws, the Union Government established a committee to examine the MSP mechanism further. This committee included farmers’ representatives, central and state governments, agricultural economists, and scientists.

Benefits of Legal Status of MSP

• Providing Income Security: MSP provides procurement by the government at a minimum guaranteed price. Legalising it would ensure that farmers have a guaranteed and fair compensation.
• Prevention of Distress Sales: With guaranteed procurement by government at MSP farmer would not resort to distress sales in case price of crops falls below MSP level.
• Encourages Crop Diversification: The legalisation of MSP would lead to procurement of crops beyond rice and wheat which forms bulk of the government procurement now, which in turn would incentivise farmers to diversify their crops.

Issues with Legal Status for MSP

• Infrastructure: Establishing the necessary infrastructure for MSP enforcement may be complex. Adequate storage facilities are crucial for procuring produce at MSP rates, especially when buyers are scarce.
• Resource Constraints: The government might lack the physical resources to store large quantities of crops. Balancing procurement costs and expenditure becomes a critical concern.
• Fiscal burden: Providing legal guarantee to MSP will greatly increase the food subsidy bill which is already 1.9% of gdp in 2022.
• Market distortion: It will disincetivise private traders from procuring cereals as price fluctuations will make it economically unviable.
• WTO subsidy Principle: It will violate the subsidy principle of WTO according to which subsidies which are market distortionary should be abolished.