After failing to convince a section of farmers, the government is repealing the 3 farm laws that sought to give increased freedom to farmers to sell to anyone outside sarkari mandis without mandi fees etc.
Agitating farmers now want a law to make purchase at Minimum Support Price (MSP) a legal obligation. What is MSP and what happens with or without legal guarantee for MSP? An explainer.
Based on the recommendations of the Commission for Agricultural Costs and Prices, Central government declares Minimum Support Prices (MSP) for some crops before the farmers begin to sow the crop.
MSP is announced for 7 cereals (paddy, wheat, maize, bajra, jowar, ragi and barley), 5 pulses (chana, tur/arhar, moong, urad and masur), 7 oilseeds (rapeseed-mustard, groundnut, soyabean, sunflower, sesamum, safflower and nigerseed) and 4 commercial crops (sugarcane, cotton, copra and raw jute).
For sugarcane, MSP is called Fair and Remunerative Price (FRP). Some States announce State Advised Price (SAP) which is generally higher than FRP.
When market prices dip below MSP, Government agencies like FCI/CCI/JCI [Food/Cotton/Jute Corporations of India], NAFED, NCCF, CWC, SFAC and State government agencies arrange for purchase of these crops at MSP. Sugarcane is directly bought by sugar mills at FRP/SAP.
FCI and State agencies mainly buy wheat, paddy (for rice) and coarse grains.
National Agricultural Federation Cooperative Marketing Federation of India (NAFED) and Small Farmers’ Agribusiness Consortium (SFAC) mainly buy oilseeds and pulses under Price Support Scheme (PSS).
Total amount paid to wheat farmers increased from Rs.33,874 crore in 2013-2014 to Rs.75,060 crore in 2020-2021.
For paddy, the increase was even bigger: from Rs.63,928 crore in 2013-14 to Rs.172,752 crore in 2020-21.
For pulses, the amount paid to farmers in 2013-2014 was only Rs.236 crore and increased to Rs.10,530 crore in 2020-2021
In 2020-21, about 75% of sugarcane production was offered to sugar mills at FRP/SAP; 50% of paddy & 40% of wheat was sold to FCI or State agencies on MSP and 25% of cotton produced was sold to CCI on MSP. For other crops, MSP procurement was 5% of production or less.
Substantial increase in MSP procurement indicates that MSP is being increased year after year and it is racing ahead of market prices. This suggests that there is over-production compared to (paying) market demand. Since rice is being exported, over production of rice [compared to domestic demand] can be easily discerned.
It also means that except for these 4 crops, for all other MSP crops, either market price is higher than MSP or the government agencies do not have adequate finance and infrastructure to buy from all farmers.
That brings us a question: How many farmers benefit from MSP operations?
As per NSSO’s 70th Situation Assessment Survey of Agricultural Households (2012-13, out of about 4.35 crore paddy farming households, 6% sold at MSP rate, 37% sold at non MSP rate and 57% did not sell their produce and out of about 3.52 crore wheat farming households, 6% sold at MSP rate, 31% sold at non MSP rate and 63% did not sell their produce.
In contrast, 1.54 crore rice growing farmers and 43.36 lakhs wheat growing farmers benefitted from MSP in2020-21 compared to 1.24 crore rice farmers and 35.57 lakhs wheat farmers in 2019-20.
National Food Security Act, 2013 converted the public distribution system being operated as a government scheme into a legal guarantee entitling every person belonging to a “priority household” to receive 5 kg of foodgrains per month at a subsidised price not exceeding Rs 2/kg for wheat and Rs 3/kg for rice. Priority households were further defined so as to cover up to 75% of the country’s rural population and 50% in urban areas.
At present, governments are buying about 40% of wheat and 50% of paddy at MSP for supply to nearly 100 crore ration card holders of which about 81 crore are covered under National Food Security Act, 2013.
When government is legally bound to supply cheap ration to nearly 81 crore beneficiaries under NFSA and several States also supply cheap ration to about 20 crore more beneficiaries, how can governments stop procuring wheat and paddy?
In fact, MSP is being revised upwards to give farmers better prices in line with the recommendations of Swaminathan Commission which is at least 1.5 times of the All-India weighted average Cost of Production as announced in Budget 2018-19.
Presently, there is no legal compulsion for government to buy at MSP. Nor can it force others (private traders, organised retailers, processors or exporters) to pay MSP. The government does buy wheat and paddy at their MSPs due to the need to supply the PDS’s foodgrain requirements, especially after the NFSA.
MSP, by contrast, is devoid of any legal backing. Access to it, unlike subsidised grains through the PDS, isn’t an entitlement for farmers. They cannot demand it as a matter of right.
The government can pass a law banning purchase below MSP but it would be difficult to legally force private parties to buy stuff at a fixed price.
The only crop where MSP payment has some statutory element is sugarcane. This is due to its pricing being governed by the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act. That order, in turn, provides for the fixation of a ‘fair and remunerative price’ (FRP) for cane during every sugar year (October-September). But even the FRP which was until 2008-09 called the statutory minimum price or SMP is payable not by the government. The responsibility to make FRP payment to farmers within 14 days of cane purchase lies solely with the sugar mills.
Farmgate prices vary from farm to farm as cost of cultivation varies depending on availability of labor, water, natural calamity risk etc. MSP is announced at national level which may be profitable for some but un-remunerative for others. Fixing multiple MSPs at different collection points is administratively burdensome.
Farmgate and mandi prices can be starkly different because of sparse network of regulated mandis. MSP is meaningless for majority of farmers precisely for the reason that they don’t have economic access to a mandi and their mandi-landing cost is higher than MSP.
Minimum wages and minimum prices for agri-produce are easy to legislate but difficult to enforce. Strict enforcement of such a law would mean either purchasers stopping purchase and leaving farmers in further distress or creating forged documentation to show purchase at MSP while actual payment received by farmer being less, through mutual consent of seller-buyer, forced by circumstances. Similar phenomenon in case of minimum wages is also observed.
It is thus unlikely that farmers will get remunerative prices even if the government announces MSP for private players. Legal obligation to buy at MSP may actually keep many agri-traders out of business that may harm farmers in the long run.
There is wide disparity in development of physical markets, on-farm and off-farm storage structures, facilities for standardization and grading, packaging and transportation across the country. MSP is not farmgate price. Farmer has to carry his produce to the nearest government agency procurement centre and that entails cost of transportation.
To get the right answers, we must ask the right questions. The questions are:
After taking into account stock carrying costs of FCI (storage and transit costs, losses, pilferage, quality deterioration, finance charges, local State taxes), total burden of MSP procurement of wheat/rice on Central budget works out to about Rs.170,000 crore per annum. A legal guarantee for MSP at current level of MSP may mean perhaps doubling the subsidy burden. Is it fiscally sustainable?
Over 80% of rice produced is marketed showing large scale production beyond subsistence agriculture for self-consumption by farmer family. Rice is highly water intensive crop and its ever increasing production in water deficient regions like Punjab and Haryana is a cause of concern from environmental impact viewpoint. Water table has gone done rather deep. Farmers need to switch to pulses, oilseeds, fruits and vegetables etc. rather than continuing with water guzzling crops. How far is it desirable for governments to support environmentally degrading crops in larger public interest?
How can government agencies create infrastructure to test quality of produce offered? To store and preserve it? Especially for perishable commodities? Obviously, everything offered for sale cannot be bought at MSP. The supplies are usually brought to mandis where the stock is cleaned of dust and junk and checked for quality, moisture content etc. Only the stocks conforming to specifications of ‘fair average quality’ are procured at MSP by the Central/State Government agencies. Creation of Quality testing infrastructure at multiple locations convenient for all farmers is too huge an investment. We can also hardly ignore the possibility of corruption/collusion in accepting sub-standard goods.
At present, for each crop a single MSP rate is fixed on all-India basis that is supposed to be 150% of the average cost of production. Is a fixed national level MSP, if backed by law, justified because cost of production varies may be even from district to district! Since the land holding size and productivity varies from State to State and region to region, a national level MSP gives extra profits to highly productive farmers, usually richer farmers with large land holdings and access to good irrigation facilities. A national MSP over-compensates some farmers, while leads to loss to others. If we try to fix MSP high to compensate the most inefficient, high-cost farmers, the MSP operations may not be fiscally sustainable by government. Is a differential MSP for different agro-climatic regions with varying costs of production – like differential Minimum Wages fixed by different State governments for different categories – be acceptable?
Can there be legally guaranteed MSP only for some select crops? Won’t that be injustice to producers of other crops and non-crop producers? What about farmers engaged in livestock rearing, fishing, poultry etc.? Will a legal MSP further encourage farmers to switch from non-MSP backed operations to MSP backed operations?
What happens when other small producers of non-farm goods (like street vendors) demand similar MSP procurement protection? How far can governments go in intervening in markets to protect margins of inherently costly producers?
The answers to the above questions are not easy to come by. However, the line of questioning will benefit all from a better understanding of problems and limitations.
