- GS-3: Issues related to direct and indirect farm subsidies and minimum support prices and food security
An MSP scheme to transform Indian agriculture
Context: The massive solidarity (despite deeply divisive social faultlines) seen in the recent farmers’ movement is a struggle to transform Indian agriculture. One of the core demands of the movement was regarding Minimum Support Price regime (where farmers demanded legal backing for it)
What purpose does MSP serve?
MSP could serve, in principle, three purposes —
- Price stabilisation in the food grains market
- Income support to farmers
- A mechanism for coping with the indebtedness of farmers.
How has Price stabilization policy evolved over years?
- The price stabilisation policy for food grains in India evolved over time, first with the Essential Commodities Act in 1955 to counter price rise due to speculative private trading and then MSP in the 1960s.
- A buffer stock policy with the public storage of food grains for market intervention was developed that entailed storing the procured surplus for sale through the Public Distribution System (PDS) at issue price, and market intervention to stabilise price when deemed necessary.
- This task required interlinking procurement, storage and distribution with more centralised investment and control of each of these tasks.
- These induced farmers to shift to a high-yielding varieties cropping pattern during the Green Revolution, while ensuring food security for citizens.
What has been the consequences of the above policies?
- The procurement and PDS from the Green Revolution period provided assured price incentives for rice and wheat but left out some 20 crops now under discussion for MSP including millets, coarse cereals, pulses and oilseeds.
- As a result, this partial MSP coverage skewed the cropping pattern against several coarse grains and millets particularly in rain-fed areas.
- From the time of the Green Revolution till recently, the area under cultivation of rice increased from 30 million hectares to 44 million hectares, while that under wheat increased nine million hectares to 31 million hectares.
- However, area under the cultivation of coarse cereals decreased from 37 million hectares to 25 million hectares.
- As a result, these left-out crops (grown mostly in rain-fed conditions) were not made available in ration shops, which impacted the nutritional security of people.
- Almost 68% of Indian agriculture is rain fed and the crops grown in these regions are usually more drought resistant, nutritious and staple in the diet of the poorer subsistence farmers.
- Such a regime also posed huge fiscal burden on government as the total economic cost involving subsidy for selling below market price would be around ₹3 lakh-crore.
What measures needs to be taken to reform MSP?
- Wider MSP: Greater coverage of all 23 crops under MSP is a way of improving both food security and income support to the poorest farmers in rain-fed regions.
- Price Band: Each crop within a band of maximum and a minimum price depending on harvest conditions (i.e. higher price in a bad and lower price in a good harvest year in general) will have its price set in the band.
- The price of some selected coarse grains can be fixed at the upper end of its band to encourage their production in rain fed areas.
- Bank Credit: A real breakthrough in the recurring problem of agricultural debt can be made by the linking of selling of grains under MSP to provision of bank credit particularly for small farmers.
- The farmer can get a certificate selling grains at MSP which would be credit points proportional to the amount sold and this can entitle them to a bank loan.
- Decentralising the implementing agencies: MSP scheme could be implemented effectively upon decentralising the implementing agencies under the constitutionally mandated supervision of panchayats.
What will be the additional cost for govt in case of widened MSP?
- Of the total grains produced some 45%-50% is for farmers’ self-consumption and the rest is marketed surplus.
- This marketed surplus sets the upper bound of total procurement cost from which must be deducted the net revenue recovered through the PDS (if all these crops are sold through ration shops). Preliminary estimate puts it in the range of ₹5 lakh-crore.
- This is not a big amount considering that it is of the same order of magnitude as DA to public sector employees (less than 5% of the population).
- The additional amount can be tapped from the income foregone announced in the Budget for a handful of industrial houses (₹3 lakh-crore)
- Increased expenditure on MSP will benefit more than half the population directly and another 20%-25% of the population indirectly in the unorganised sector — over 70% of India’s citizens.
Connecting the dots: