GS-3: Issues related to direct and indirect farm subsidies and minimum support prices
GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
Legal Guarantee of MSP
Context: After repealing of farm laws by government, protesting farmers are pushing for their other major demand for providing a legal guarantee that all farmers will receive remunerative prices for all their crops.
How many crops does the minimum support price cover?
The Central Government sets a minimum support price (MSP) for 23 crops every year, based on a formula of one-and-a-half times production costs.
This takes into account both paid-out costs (A2) such as seeds, fertilizers, pesticides, fuel, irrigation, hired workers and leased-in land, as well as the imputed value of unpaid family labour (FL).
Farm unions are demanding that a comprehensive cost calculation (C2) must also include capital assets and the rentals and interest forgone on owned land as recommended by the National Commission for Farmers.
There is currently no statutory backingfor these prices, nor any law mandating their enforcement.
The government only procures about a third of wheat and rice crops at MSP rates (of which half is bought in Punjab and Haryana alone), and 10%-20% of select pulses and oilseeds.
According to the Shanta Kumar Committee’s 2015 report, only 6% of the farm households sell wheat and rice to the government at MSP rates.
However, such procurement has been growing in the last few years, which can also help boost the floor price for private transactions.
Why do farmers want a law on MSP and what are the challenges with it?
Protesting farm unions under the banner of the Samyukt Kisan Morcha (SKM) said MSP based on a C2+50% formula should be made a legal entitlement for all agricultural produce, so that every farmer of the country can be guaranteed at least the MSP announced by the government for their entire crop.
Within the SKM, there are different ideas of how this demand would play out.
The All India Kisan Sabha says most of the cost should be borne by private traders, noting that both middlemen and corporate giants are buying commodities at low rates from farmers and slapping on a huge mark-up before selling to end consumers.
The Left-affiliated farm union has suggested a law which simply stipulates that no one — neither the Government nor private players — will be allowed to buy produce from the farmer at a rate lower than MSP.
Other unions, however, have said that if private buyers fail to purchase their crops, the Government must be prepared to buy out the entire surplus at MSP rates, involving a much larger burden on the exchequer, although no one has yet laid out the specific fiscal implications.
There are complaints that the current MSP regime largely benefits only two States. In this background, there is a demand for a law to guarantee remunerative prices for all farmers to be calculated according to the varied input rates in 15 different agro-climatic zones.
All farmers groups seeking a legal backing for MSP also want it extended to fruit and vegetable farmers who have been excluded from benefits so far.
What is the Government’s position?
While announcing the decision to repeal the farm laws, the Prime Minister announced the formation of a committee to make MSP more transparent, as well as to change crop patterns — often determined by MSP and procurement — and to promote zero budget agriculture which would reduce the cost of production but may also hit yields.
The panel will have representatives from farm groups as well as from the State and Central Governments, along with agricultural scientists and economists.
Both the Prime Minister and the Agriculture Minister have previously assured Parliament that the MSP regime is here to stay, even while dismissing any need for statutory backing.
A policy paper by NITI Aayog’s agricultural economist Ramesh Chand, which is often quoted by Agriculture Ministry officials, argues, “Economic theory as well as experience indicates that the price level that is not supported by demand and supply cannot be sustained through legal means.”
It suggests that the States are free to guarantee MSP rates if they wish, but also offers two failed examples of such a policy.
One is in the sugar sector, where private mills are mandated to buy cane from farmers at prices set by the Government. Faced with low sugar prices, high surplus stock and low liquidity, mills failed to make full payments to farmers, resulting in an accumulation of thousands of crores worth of dues pending for years.
The other example is a 2018 amendment to the Maharashtra law penalising traders with hefty fines and jail terms if they bought crops at rates lower than MSP. As open market prices were lower than the (legalised) MSP levels declared by the State, the buyers withdrew from the market and farmers had to suffer and the move was soon abandoned.
