Syllabus
GS Paper 3 – Issues related to direct and indirect farm subsidies and minimum support prices; Public Distribution System- objectives, functioning, limitations, revamping; issues of buffer stocks and food security;
What does this article provide?
The article discusses the need to revisit the Minimum Support Price (MSP) framework, highlighting the issues of competitive populism in providing free food, power, and highly subsidized fertilizers. It suggests that such measures are unsustainable and lead to a “race to the bottom.” The article emphasizes the importance of reforming the MSP framework to ensure long-term sustainability and avoid populist measures that can harm the economy.
Potential Topics for Prelims
Minimum Support Price (MSP), Rabi and Kharif Crops, Commission for Agricultural Costs and Prices (CACP), Fair and Remunerative Price, Crop Diversification, Agricultural Subsidies, Food Security Act, Procurement Policies, Farm Bills, Public Distribution System (PDS)
Potential Topics for Mains
Minimum Support Price, need for MSP reforms, Agricultural Marketing, Issues related to Direct and Indirect Farm Subsidies, Government Policies related to Agriculture, Impact of Freebies and Populist Measures on Economy
Source
Indian Express
Minimum Support Price (MSP) Reforms
Introduction
In a market economy, the pricing of agricultural outputs and inputs follows the same principles as any other product, driven by the forces of demand and supply. However, government interventions often disrupt this balance, leading to significant inefficiencies. This does not imply that governments should be passive; rather, their role is to ensure that markets function effectively. By investing in information symmetry and physical infrastructure, governments can facilitate the creation of efficient value chains through institutional innovations, minimizing the price gap between farmers and consumers. Promoting futures markets and options can also mitigate risks, enabling farmers to make informed planting decisions based on future price predictions instead of relying on last year’s prices. Such forward-thinking strategies resonate with the economic reforms India adopted in 1991, paving the way for sustainable agricultural growth.
What is MSP?
- Definition of MSP: Minimum Support Price is the rate at which the government procures crops from farmers if market prices drop below this threshold.
- Price Floor: MSP acts as a price floor, ensuring farmers receive a minimum income to cover their cultivation costs and earn some profit.
- Introduction: The MSP system was initiated by the Centre with the establishment of the Agricultural Prices Commission (APC) in January 1965.
- Purpose: Introduced to enhance the production of paddy and wheat, as India was reliant on imports in the 1960s, importing 10 million tonnes (MT) of wheat in the mid-1960s under PL 480 from the US against rupee payments.
- CACP Recommendations: MSP is determined by the Cabinet Committee on Economic Affairs (CCEA) based on suggestions from the Commission for Agricultural Costs and Prices (CACP).
- State and Central Views: Takes into account perspectives from State Governments and relevant Central Ministries/Departments.
- Factors for Deciding MSP: CACP considers several aspects:
- Production costs
- Demand-supply dynamics of various crops in domestic and global markets
- Domestic and international pricing
- Inter-crop price parity
- Terms of trade between agriculture and non-agriculture sectors
- Potential impact of price policy on the overall economy
- A minimum margin of 50% over the cost of production.
- MSP Crops: MSP is applicable to 22 mandated agricultural crops, including:
- 14 Kharif crops
- 6 Rabi crops
- 2 commercial crops
Importance of MSP
- Drought Impact: The twin droughts of 2014 and 2015 led to declining commodity prices, severely affecting farmers.
- Economic Shocks: The dual impact of Demonetisation and GST rollout crippled the rural economy, particularly the non-farm sector and agriculture.
- Economic Slowdown: The economic deceleration post 2016-17 and the subsequent pandemic kept the situation precarious for most farmers.
- Input Costs: Rising costs of diesel, electricity, and fertilizers have added to the farmers’ struggles.
- Fair Pricing: MSP ensures farmers receive a fair price for their crops, reducing farm distress and poverty, crucial in states where agriculture is a primary livelihood.
Need for Reforming the MSP System
- Changed Condition: India is now a food surplus nation and is the world’s largest exporter of rice, unlike the mid-1960s when it was an importing country.
- Increasing Buffer Stocks: The Food Corporation of India holds rice stocks that are almost three times the buffer stock norms.
- Expanded MSP Basket: The number of crops under MSP has increased over time, largely due to political pressures.
- Production Imbalance: Surplus rice and wheat production is driven by open-ended procurement, free power pricing, and highly subsidized fertilizer prices.
- Environmental Issues: The dominance of wheat and rice cultivation leads to groundwater depletion, soil degradation, and greenhouse gas emissions — contributing to ecological problems.
- Economic Risk: Competitive populism, such as giving free food, power, or highly subsidized fertilizers, or pocket money schemes like Ladli Behna, is a race to the bottom.
- Market Disruption: Government interventions in price control often disrupt the system, leading to significant inefficiencies.
- System Inefficiency: A highly regulated land market, along with the pricing of inputs and certain outputs (like rice and wheat) and massive procurement, results in substantial system inefficiencies.
Concerns Related to MSP in India
- Limited Scope: MSP is officially announced for 23 crops, but primarily only rice and wheat are procured and distributed under the National Food Security Act (NFSA).
- For other crops, MSP implementation is ad-hoc and minimal, leaving most farmers growing non-target crops without benefits.
- Ineffective Implementation: The 2015 report by the Shanta Kumar Committee revealed that only 6% of farmers actually receive MSP benefits.
- This indicates that around 94% of farmers do not benefit from MSP due to inadequate procurement mechanisms and lack of market access.
- Skewed Crop Dominance: The emphasis on MSP for rice and wheat has led to a biased cropping pattern favoring these staples.
- This overemphasis can cause ecological, economic, and nutritional issues and may not align with market demand, limiting income potential for farmers.
- Dependency on Middlemen: The MSP-based procurement system often involves intermediaries like middlemen, commission agents, and officials from Agricultural Produce Market Committees (APMCs).
- Smaller farmers may struggle to access these channels, leading to inefficiencies and reduced benefits.
- Government Burden: The government incurs a significant financial burden in procuring and maintaining buffer stocks of MSP-supported crops.
- This diverts resources that could be allocated to other agricultural or rural development programs.
Proposed Reforms for MSP System
- Redefining Government Role: Government should ensure markets function efficiently by investing in information symmetry and physical infrastructure.
- Creating Efficient Value Chains: Introduce institutional innovations to minimize the price gap between farmers and consumers.
- Encouraging Futures Markets and Options: Help farmers decide on planting based on future price projections rather than previous year’s prices.
- Land Reforms: Open up land markets, starting with land lease markets.
- Direct Benefit Transfers: Leverage the digitalized food system to move towards direct cash transfers to targeted beneficiaries who need support the most.
- Subsidy Reforms: Provide input subsidies to needy farmers on a per hectare basis.
- This should be coupled with deregulating the pricing of food and inputs like fertilizers and power.
Way Forward
- Encouraging Crop Diversification: Government can expand the list of crops eligible for MSP support to reduce the dominance of rice and wheat. This will offer farmers more choices and align crop cultivation with market demand.
- Targeted MSP Allocation: Instead of providing MSP for all crops across all regions, the government can prioritize crops essential for food security and those that positively impact farmer livelihoods. This targeted approach can help in optimizing resource allocation.
- Improving Procurement Systems: Enhance and modernize procurement mechanisms to ensure farmers have access to MSPs. This may involve:
- Creating more efficient procurement systems.
- Reducing reliance on middlemen.
- Expanding the reach of procurement agencies.
Conclusion
Reforming the MSP system is crucial to address the evolving needs of Indian agriculture. While the MSP has historically played a vital role in ensuring price stability and farmer welfare, it now requires a comprehensive overhaul to align with current market dynamics and sustainability goals. The focus should be on promoting crop diversification, improving procurement mechanisms, and introducing direct benefit transfers to enhance efficiency and inclusivity. By adopting a targeted and forward-thinking approach, the government can create a more resilient agricultural framework that not only supports farmers but also ensures food security and environmental sustainability.
Related PYQ
What do you mean by Minimum Support Price (MSP)? How will MSP rescue the farmers from the low income trap? [UPSC CSE – 2018 Mains]
Practice Question
Discuss the need for reforms in the Minimum Support Price (MSP) system in India. Highlight the challenges associated with the current system and suggest potential reforms to make it more efficient and sustainable. [250 words]
Guidelines to Answer
- Introduction:
- Briefly introduce the concept of MSP and its historical significance.
- Current Scenario and Challenges:
- Discuss the limited scope and ineffective implementation of MSP.
- Highlight the skewed crop dominance and dependency on middlemen.
- Mention the financial burden on the government and market disruptions caused by MSP.
- Need for Reforms:
- Explain why reforms are necessary, considering the changed condition of India being a food surplus nation and ecological concerns.
- Proposed Reforms:
- Suggest redefining government role in ensuring market efficiency.
- Emphasize the need for creating efficient value chains and promoting futures markets.
- Propose land reforms and the introduction of direct benefit transfers.
- Advocate for subsidy reforms and crop diversification.
- Way Forward:
- Highlight steps to encourage crop diversification and targeted MSP allocation.
- Suggest improvements in procurement systems and reducing intermediary roles.
- Conclusion:
- Summarize the need for a comprehensive overhaul of the MSP system to align it with current market dynamics and sustainability goals.