MSP, Crop procurement and Inflation
10th Jun, 2023
RBI’s Monetary Policy Committee (MPC) must consider the inflationary impact of about 5%–11% increase in the minimum support price (MSP) for farm produce in its bi-monthly policy.
About the Food inflation and price rises:
- There is a 7% increase in paddy MSP could lead to higher prices if the crop is not higher than last year’s output.
- Procurement takes place for rice, whose inflation is already high at 11%.
- While procurement of cereals was primarily in terms of wheat and rice, the procurement of pulses was not much.
What is Minimum Support Price (MSP)?
- The MSP is the rate at which the government purchases crops from farmers, and is based on a calculation of at least one-and-a-half times the cost of production incurred by the farmers.
- MSP isa “minimum price” for any crop that the government considers as remunerative for farmers and hence deserving of “support”.
- Crops under MSP:
- The Commission for Agricultural Costs & Prices (CACP) recommends MSPs for 22 mandated crops and fair and remunerative price (FRP)for sugarcane.
- CACP is an attached office of the Ministry of Agriculture and Farmers Welfare.
- The mandated crops include 14 crops of the kharif season, 6 rabi cropsand 2 other commercial crops.
- In addition, the MSPs of toria and de-husked coconut are fixed on the basis of the MSPs of rapeseed/mustard and copra, respectively.
How MSP can aggravate Inflation?
- Sharp and frequent increases in MSP can feed inflation too.
- It is believed that it was MSP increases on paddy and wheat that fuelled high food inflation in the years to 2013.
- Government procurement at MSP is benefiting the large traders than farmers.
- Small farmers typically do not have enough marketable surpluses.
- Their crop is usually sold to traders at low post-harvest prices in the village itself or the nearest ‘mandi’.
According to recent research, farmers may typically get as little as 25% of the price that consumers finally pay.
- The input costs have been rising faster than sale prices, squeezing the meagre income of the small farmers and driving them into debt.
- MSP is attractive towards wheat and rice which is produced by large farmers. Small farmers who mostly dependent on vegetables, pulses, coarse grains are at disadvantage.
- The payments are delayed when the farmers are in immediate need of cash.
- In some states, the awareness about the time of their announcement is very low.
- The reason for not selling at MSP was that the purchase centres were located at distance which required high transportation costs.
Problems need to be addressed:
- Low Yield: To use rights manures and fertilisers to increase the yield and providing subsidies.
- Access to Quality seeds: Quality seeds are primary for higher yield.
- Irrigation: Till now India’s one-third of the land remains less or no irrigated.
- Low profit margins: Farmers are facing increase in cost of production, which depends upon several factors namely, cost of fertilisers, transportation and MSP.
- Lack of mechanisation: Due to less affordability, mechanisation is less inclusive in India.
- Lack of awareness: Farmers must be educated regarding increasing production.