It expects students to analyse the problems and challenges associated with the minimum support price regime in India. It also expects students to analyse its impact (whether benefits or drawbacks) on agriculture sector.
Introduction:
MSP is the minimum price paid to the farmers for procuring food crops. They are recommended by the Commission for Agricultural Costs and Prices (CACP) and approved by Cabinet Committee on Economic Affairs.
Body:
It acts like a buffer to protect the farmer in case the price of the commodity produced by the farmer falls below the market price due to bumper crop which causes a glut in the market, the Government agencies (usually the Food Corporation of India) procures the grains from the farmers at the prices announced by the Government. CACP recommends MSPs of 23 commodities.
Problems and challenges associated with the minimum support price regime:
Stagnant rates of MSP: The government declaration of Minimum support prices do not increases at par with increase in cost of production. As CRISIL has pointed out that the increase in MSP has indeed fallen in the year between2014-17.
MSPs have unequal access: The benefits of this scheme do not reach all farmers and for all crops. There are many regions of the country like the north-eastern region where the implementation is too weak.
Procurement problems: Almost 2/3rd of the total cereal production is taken through the route of MSP, leaving only 1/3rd for open market. Hence, farmer can’t take benefit of market prices and has to depend solely on the MSP. It prevents the farmer from earning of profits.
Higher MSP over-incentivise production leading to supply glut. Hikes in MSP also adversely affect the exports by making Indian farm goods non competitive especially when international market prices are lower.
Free market principle distorted: It distorts the free market. It favours some particular crops over other crops.
Degradation of natural agricultural components: MSP lead to non-scientific agricultural practices whereby the soil, water are stressed to an extent of degrading ground water table and salinisation of soil.
Killing of competition: Any interference by the government kills the competition. This affects the agents who procure the crops at lower prices and sell them at higher prices and earn profits. This mainly disturbs the working of people who sell these outputs from farmers into the open market.
Surplus storage: Surplus procurement without sufficient storage has resulted in huge piling of stocks in the warehouses. The stock has now become double the requirements under the schemes of PDS, Buffer stock etc.
Issues in WTO: India’s MSP scheme for many crops has been challenged by many countries in the WTO. For example, Australia has complained of the MSP on wheat, US and EU complained of sugarcane and pulses MSP.
Despite these numerous challenges posed by the MSP, it has proved beneficial in following aspects:
The Minimum Support Price mechanism proved beneficial in transferring incomes to rural areas and to counter farm level inflation.
It countered the agricultural distress brought on by natural hazards in the country.
Higher profits for the farmer also helped them to invest in necessary infrastructure and equipment.
Lack of sufficient penetration of agricultural insurance schemes for farming has made farming a risky profession exposed to weather and price fluctuations. The minimum support price to some extent protected the farmer by guaranteeing a minimum floor price so that they can plan in advance for the next season.
MSP motivated farmers to grow targeted crops and increased production. It also incentivizes production of specific food crops which is short in supply.
Tackling the challenges associated with Minimum Support Price:
The suggestion of the National Commission of farmers ( Dr.M S Swaminathan committee, 2007 ) to fix the MSP at cost of production + 50% so as to have a definitive roadmap for fiscal expenditure and better remunerative output for farmers rather than ad hoc methods.
Farmer awareness about the benefits of crop diversification so as to produce more pulses to ensure nutritional security and prevent supply-side shocks.
Impetus to improve the agriculture infrastructure should be provide such as cold storage building, warehouses for perishable production, so in case of surplus production they will not be wasted. For instance, in this light a new pan India Central Sector Scheme-Agriculture Infrastructure Fund is established.
NITI Aayog is working on alternative mechanism. A counterpart of the MSP is the Market Intervention Scheme (MIS), under which the state government procures perishable commodities like vegetable items.
Price Deficiency Payment (PDP): Niti Aayog also proposed PDP; PDP is to support the farmers in case the market price falls below Minimum Support Price (MSP) is called, “Price Deficiency Payment”. This system aims to provide a part (for example, 70-75 %) of the difference between the MSP and the market price to the farmers.
Some states like, Haryana government launched Bhavantar Bharapai Yojaan for vegetables, the government pays the farmers the difference between model rate (the average prices in major mandis) and the minimum support prices (MSPs). It can be better alternative.
Conclusion:
On the whole, it can be said that the MSP has succeeded in providing floor rate for major food grains and other produces. Most of the times it did not allow market prices to fall below the MSP fixed for them. Hence, the MSP should continue as it insulated farmer from an unfavourable market conditions by assuring them a minimum return for their produces but at the same time the newly emerged challenges should also needs to be addressed to increase its effectivity.
