TOPIC- GS PAPER-3 ; INDIAN ECONOMY; Issue related to direct and indirect farm subsidies and minimum support prices
What is MSP?
- Minimum Support Price is the price at which government purchases crops from the farmers, whatever may be the price for the crops.
- It protects the farmers against excessive fall in price during bumper production years.
- The minimum support prices are a guarantee price for their produce from the Government.
- Minimum Support Price is an important part of India’s agricultural price policy.
- The MSP helps to incentivize the framers and thus ensures adequate food grains production in the country.
- It gives sufficient remuneration to the farmers, provides food grains supply to buffer stocks and supports the food security programme through PDS and other programmes.Currently MSP is announced for 22 crops (14 Kharif crops, 6 Rabi crops and 2 commercial crops)
MSP vs PROCUREMENT PRICE vs ISSUE PRICE
The minimum support prices are announced by the Cabinet Committee on Economic Affairs at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).
There are times when the government procures at a higher price than the MSP. Here, the price is called as procurement price. The procurement price will be announced soon after the harvest. Normally, the procurement price will be higher than the MSP, but lower than the market price.
The price at which the procured and buffer stocks of food grains are provided through the PDS is called as issue price.
OBJECTIVES OF MSP
- It ensure remunerative prices to the farmers by encouraging higher investment and production as it generally affect farmers’ decisions indirectly, regarding land allocation to crops, quantity of the crops to be produced etc
- It ensures adequate and affordable food grains to all the people.
- MSP is a tool to achieve food security and tackle shortages of key food items.
- Higher farm profits will encourage farmers to spend more on inputs, technology etc, which can in turn benefit companies in the agri inputs and farm equipments space.
- MSP also ensures that the country’s agricultural output responds to the changing needs of its consumers.
- MSP becomes a very important benchmark for the producer, because it helps him estimate the revenue, aiding the financial planning and also influencing borrowing decisions if any.
HOW THE PROCESS WORKS?
- MSP is computed on the basis of the recommendations made by the Commission for Agricultural Costs and Prices (CACP)
- It considers factors such as the cost of production, change in input prices, market price trends, demand and supply, and a reasonable margin for farmers in fixing MSP
- The Food Corporation of India, which is the nodal agency for procurement, along with State agencies, establishes purchase centres for procuring food grain under the price support scheme.
- The State government decides on the location of these centres with the aiming of maximising purchases.
CACP calculates COST OF PRODUCTION at 3 levels
1) A2 : Includes cost of inputs such as seeds, fertilizer, labour
2) A2 + FL : Includes implied cost of family labour (FL)
3) C2 : Includes implied rent on land and interest on capital assets over and above A2 + FL
National Commission on Farmers under the Chairmanship of Prof. Swaminathan recommended that MSP’s must be atleast 50% more than the cost of production under C2 method.
i.e. MSP=1.5 COP
RECENT DEVELOPMENTS IN MSP
- Government has increased the MSP of Kharif crops for marketing season 2020-21, to ensure remunerative prices to the growers for their produce.
- The differential remuneration is aimed at encouraging crop diversification.
- The increase in MSP for Kharif Crops for marketing season 2020-21 is in line with the Union Budget 2018-19 announcement of fixing the MSPs at a level of at least 1.5 times of the All-India weighted average Cost of Production (CoP), aiming at reasonably fair remuneration for the farmers.
LIMITATIONS OF MSP
- Hiking the MSP without investing in infrastructure is just a short-term measure to resolve farmer distress. While it does deliver immediate results, long-term developments to back-it up are also important.
- The benefits of MSP are out of reach for a majority of farmers and it does not exercise a lot of influence on the actual market price.
- Offering a higher MSP for some crops incentivizes the farmer to produce surplus quantities of those crops, there would be insufficient production of some other crops.
- MSP model is that the GoI determines MSP as a single price for the crops across the nation. In a country like India with diverse agro-climatic zones, it is not equally profitable to all the regions.
- Despite its procurement commitments under MSP to protect the farmers and to maintain the buffer stocks, the government has failed to create a robust storage infrastructure.
- Too much of a hike on MSP either paves way for inflationary effects on the economy, with a rise in prices of foodgrains and vegetables, or loss to government treasury if it decides to sell at a lower price as compared to the higher MSP it bought at.
- Since MSPs are not offered for fruits and vegetables, the focus shifts from horticulture production due to a lack of incentives. India ranking 103 out of 119 countries in the GLOBAL HUNGER INDEX 2018 is a clear indicator of nutritional deficiency and the need for diversification of crops.