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Demands to legalise MSPs is retrograde, can destroy the farm sector and hurt the Indian economy: Explained

In any free-market economy, the price of any goods and services produced in the country has to be decided by market forces and not by the state. However, if the state starts to regulate the price of goods, the market equilibrium will eventually disrupt leading to either higher prices of the product or completely crashing down the value.

Ever since the Modi government passed three farm laws to free the country’s agricultural marketing and procurement systems, the farmers, especially from Punjab have hit the streets to demand a rollback on the law.

One of the main arguments of the protesting farmers is that the newly enacted laws would alter the existing procurement system and could nullify the MSP system that guarantees them a minimum income to their produce. Fearing a loss to their income through the alleged dismantling of the MSP system, the farmers have now demanded that the centre should bring in a law to give MSPs a legislative framework.

Let us understand what is MSP and how does the system work. We shall also discuss how legalising MSPs is a retrograde step that could be dangerous to India’s farm sector.

What is MSP?

The MSP or Minimum Support Price is the minimum price set by the government at which farmers can expect to sell their produce for the season. If and when market prices fall below the announced MSPs, procurement agencies step in to procure the crop and ‘support’ the prices.

Theoretically, MSPs, which is guaranteed minimum price for the farmers for their produces also acts as a safety net or insurance for them when the market prices go down. It is also the price that government agencies pay whenever they procure the particular crop under their current procurement rules.

Who announces MSP?

Every year, at the beginning of each sowing season, the Cabinet Committee of Economic Affairs announces MSP for various crops based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). The CACP, an advisory body, calculates the MSP based on the demand and supply, the cost of production and price trends in the market among other things when it fixes MSPs.

Also, CACP is not a statutory body set up through an act of Parliament and it can only recommend MSPs. However, the decision on fixing and enforcing finally falls under the government.

At present, the centre announces MSPs for 23 farm commodities — 7 kinds of cereal – paddy, wheat, maize, bajra, jowar, ragi and barley, 5 pulses – chana, arhar/tur, urad, moong and masur, 7 oilseeds – rapeseed-mustard, groundnut, soya bean, sunflower, sesamum, safflower and nigerseed and 4 commercial crops – cotton, sugarcane, copra and raw jute.

Interestingly, sugarcane is the only crop that has provisions for statutory MSP. These provisions came due to its pricing being governed by the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act. The price of Sugarcane is fixed under a ‘fair and remunerative price’ (FRP) during every sugar year, announced by the government.

Present status of MSP and procurement by states

Other than for Sugarcane, MSPs for any other farm produce does not have any legal backing. Additionally, even though the centre announces a fixed price in the form of MSP, the procurement does not always happen at MSPs. Most of the times, farmers sell their produce at much lower prices than MSP owing to certain uncontrollable market dynamics, factors such as excess supply, lack of storage infrastructure etc.

Another major problem with the MSP is lack of government machinery to the procure all crops that are under the MSP system. The two cereals – wheat and rice, which forms the basis of India’s food security act, are majorly procured by Food Corporation of India under its PDS network.

The state government has the responsibility to procure the produce from the farmers and those states that have better infrastructure and procurement policies will benefit from the current system. Less than 6 per cent of farmers benefit from the current minimum support prices (MSP), according to the Shanta Kumar-headed High-Level Committee on Restructuring of Food Corporation of India (FCI). 

The MSP-based procurement system has also found success in states which has a well-oiled system of middlemen, commission agents and APMC officials. In Punjab, more than 95 per cent of paddy and wheat growers benefit from MSP while in Uttar Pradesh, only 3.6 per cent of the farmers avail the benefit.  

Does the new farm laws concern MSPs?

As stated above, currently the provision of MSPs does not have any legal backing. The three new farm laws passed by the Modi government also do not have any provision for MSP. Legally, there is no law that puts an obligation on the government to purchase farm produce at MSPs from farmers. There are also no laws that put the onus on private players to buy at MSP.

However, based on rumours that the Modi government will repeal MSPs, the farmers from Punjab have now descended on the streets asking for the rollback of the three laws. Farmers are upset with the three farm bills because none of them mentions anything about MSP.

Even though Prime Minister Narendra Modi and his government have categorically stated that the MSP system will remain, the protesting farmers are in no mood to relent. In fact, the three farm bills that have been introduced by the government concerns with the reform of APMCs and introduction of contract farming and have nothing to do with MSP.

Instead, the objective of the new laws is simply to open up the procurement structure in the country and grant farmers, traders freedom of choice to sell and buy agricultural produce outside the existing APMC mandis. The farmers’ premise for demanding the legal backing for MSPs comes from the fear that minimum support price (MSP) will not be enforced once private mandis come up.

Nevertheless, the so-called farmer protests have now turned political resulting in these protesting farmers pushing for several other unconnected demands including the legal backing for the MSPs. One of the major demands of the protesting farmers is that they want the government to codify MSPs and provide legal backing.

However, setting MSP as a floor price legally will effectively derail the market for other players. Legalising MSP is also retrograde and anti-market, which could cause devastation to the Indian farm sector.

The legalisation of MSP and its effects on the agriculture sector and economy

At outset, it is important to understand how public procurement process under the MSP system works in the country. Farmers cultivating any of the 23 crops under the current MSP regime can sell his produce at the local APMC market that falls under his ‘trading area’. Theoretically, the Food Corporation of India purchases the produce brought by the farmer at MSPs that are announced by the government just before each sowing season.

However, the current public procurement by the FCI and the state government do not take place equally in all states. For example, Punjab alone contributes to 127 lakh metric tonnes, i.e., 33 per cent of the total wheat procurement in the country, thanks to its well-structured APMC structure. In states like Bihar, the procurement is less than 0.1 lakh metric tonnes.

In addition to the existing horizontal inequality in procurement among states, there are no guarantees for any farmers that his produce will be procured at the stipulated MSPs. In reality, MSP is just a notional indicative price for the procurement under which the farm produce cannot be bought, however, most of the times the procurement is done at a price much less than MSP.

For example, the MSPs for maize in the current sowing season for Rs 1,850/quintal. However, the market price for maize was somewhere around Rs 1,200/quintal despite the centre’s higher MSP. The increased gap between the MSP and the actual market price is due to the basic demand and supply mismatch. Interestingly, the current fiscal was one of the most productive years for the agricultural sector, which saw a marginally higher growth compared to other sectors amidst the coronavirus induced lockdowns.

The inclination for an average farmer to demand legal backing to MSP comes from this growing gap between MSPs and the realised market price. It is not wrong or unjustified for an average farmer to demand a better price for his produce. However, the legal backing of MSP or codifying the structure of MSP into law and thus regulating the prices of agricultural produces in the country would cause a devastating blow for the farm sector in the country.

The reasons for this are simple. In any free-market economy, the price of any goods and services produced in the country has to be decided by market forces and not by the state. The principles of free-market economy stipulate that the market dynamics will lead to a better price realisation for a good thus creating a balance between producers and consumers. However, if the state starts to regulate the price of goods, the market equilibrium will eventually disrupt leading to either higher prices of the product or completely crashing down the value.

For example, if the state decides to fix legal MSPs for paddy at Rs 2,000/quintal and the market prices are much lesser than the MSPs, private traders would stay away from buying the produce leading to excessive supply than the demand. As demand for the product diminishes, the price of paddy crashes automatically. As buying at lower prices is prohibited as per the law, a buyer cannot buy at a lower price.

However, it also leads to another major problem. The big corporations, private traders can now use the system to advance their interests and force the market to crash only to pick the commodity later at a much lower price. Codifying laws for MSP will be a death knell for a small farmer in the country.

The codification of the MSPs structure will also have a bearing on India’s Public distribution system. With government legalising the procurement prices, the FCI has to procure the cereals at an already prescribed price, which may increase in times of shortage, thus putting extra burden on state finances.

Legalising MSP could create inflation, agro exports will lose the competitive edge

One of the major arguments against legalising MSP is that it could impact the macro-economic prospects of the country by risking an abrupt increase in inflation. The higher costs of procurement and open market operations of food grains caused due to a statutory MSP will increase the food prices, leading to inflation in the economy. The obligation for the government to procure at the prescribed rate of MSP, which will be backed by law, will create supply-side inflationary trends in the economy.

The poor in the country can no more afford such high priced food grains. The risk may also come from the fact that with no demand-side pressure, the price of the food grains may crash due to the market dynamics despite having made MSP legal, making the farmers once again the victim of the flawed policy.

On the exports front too, legalising MSP could cause nothing but harm to the farmers. If MSPs determined by the government and enforced by a law is higher than the prevailing rates at the international market, the agriculture produce from India will become costlier.

India’s agriculture exports, which accounts for about 11 per cent of the total export commodities, will be less attractive leading to losing out in international markets, results in the generation of less foreign exchange. Such volatility in the forex reserves of the country and need for more dollars to fund our increasing imports can also devaluate rupee, fuelling the vicious cycle of Current Account Deficit and inflation.

In a way, the very demand of farmers to force the government to bring in a legislative framework for the MSPs and procurement could cause devastating effect not just on farm sector but also on country’s economy on a whole. Instead of rushing towards pressurising the government to repeal the three farm laws and demanding for codifying MSPs into laws, the protesting farmers should perhaps be aware of the irreversible damage that could cause to the agro sector by enacting laws to make MSPs a legal right.

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