Subscribe
The ongoing protests over legalising minimum support price (MSP) have brought attention to the challenge of determining a fair price for farmers’ produce.
While the government currently provides MSP for 23 crops, the remuneration is not enough to make farming profitable.
Agriculture and market experts suggest that the Commission for Agricultural Costs and Prices (CACP) must rethink how it measures the cost of agricultural produce in order to ensure a fair price to farmers without worsening the already rising food inflation. They also emphasise the need to align MSP with the country's macroeconomic goals and climate variations.
Shweta Saini, chief executive officer for Arcus Policy Research and Ramsha Khan, analyst with Arcus said that MSP influences farmers’ sowing decisions and have served as a basis for many policy actions. Below is what they told Down To Earth (DTE).
Inflation, particularly food inflation, is a crucial metric tracked by everyone from policymakers to households. Recently, RBI Governor too iterated its centrality and how maintaining its levels within a range was critical for the country. When outside range (RBI’s is 4 per cent +/-2 per cent), governments set into action. Usually, both central and state governments implement various programmes and policies to influence prices received by farmers and those paid by consumers.
From MSP to the Essential Commodities Act, 1955 and the public distribution system under National Food Security Act, 2013, the Centre makes deliberate policy decisions on agri-commodity prices. Besides, there are also policies on the global trade side, where tools like customs’ duty, minimum export price, export duties, etc. are leveraged to influence domestic prices.
First, a brief context.
In a study, we found that out of approximately 93 million farmers in India, close to 9 per cent reported sales at MSP (2018-19- the latest year for which the data is available). Small and marginal farmers made up 75 per cent of these MSP beneficiaries, accounting for approximately 42 per cent of total MSP sales value.
Sugarcane, paddy, wheat and, to some extent, cotton were the predominant crops benefiting under MSP. Geographically, most MSP beneficiaries stayed in Chhattisgarh, Uttar Pradesh, Madhya Pradesh and Telangana, apart from Punjab and Haryana. Despite being in existence for nearly 58 years, the MSP regime appears to have benefited less than 10 per cent Indian farmers.
In the recent years, central government has been expanding its procurement, encompassing newer states and crops. Both pulses and oilseeds are also emerging to be focus crops.
Then there are state initiatives like the recent one from Haryana. The state has assured procurement of all 23 crops at MSP.
Overall, it has been observed that, despite its smaller and more geographically concentrated scale of impact, MSP (i) has been able to provide a floor price for the procured crops, at least in states where GOI procures; (ii) it nudges farmers’ crop choices; and, among other things (iii) when mandi prices fall below MSP, many policy actions get triggered.
In 2016-17, a 14 per cent increase in MSP per gram led to a 33 per cent increase in production. Similarly, for toor (pigeon pea) and urad (black gram), a 9 per cent and 8 per cent increase in MSP resulted in over 90 per cent and 46 per cent increase in pulse production, respectively. Similarly, to provide price support for important crops such as pulses, the GOI opened MSP-buying through agencies such as National Agricultural Cooperative Marketing Federation of India Ltd or NAFED.
MSP is out of sync with market dynamics and there are three primary reasons for it.
The first is a lack of sufficient data. The absence of reliable and timely data complicates MSP estimation. It is difficult to estimate demand and required supply if crop consumption estimates are unknown. The latest National Sample Survey Office data (2022-23) was released after a ten-year gap, following the 68th round in 2011-12.
The second reason is that MSP increases push up inflation. If the MSP for moong (green gram) in the 2023-24 marketing year increased by 10 per cent in a single year, we cannot expect the value chain to absorb the high costs without passing them on to the end consumer.
The final reason for the disconnect is that MSP of imported commodities need parity with landed imports. The same metrics cannot be used to estimate MSP for rice (a net exported commodity) or soybeans (where we are a large importer of soybean oil and a residual exporter of soybean meal).
When it comes to imported commodities, like soybean oil, both current global prices and future price trends are important. For example, if global prices for soybean oil are expected to drop, cheaper imports could replace locally produced soybean oil, which is made from soybeans bought at the Minimum Support Price (MSP) in India. If this happens, the Indian government would likely increase customs duties on edible oil imports to protect local farmers, but this would make imported oil more expensive for consumers.
Key questions to consider are: Is the MSP for Indian soybeans set too high? How can Argentina produce and export soybean oil to India more cheaply than Indian producers?
Let us take the example of mustard. It was the second most important oilseed crop until 2022-23, but it is now the first. For the majority of the last two years, mustard prices in key producing states have fallen below MSP.
Despite the lower prices, farmers continue to produce more mustard because it is a highly profitable crop for farmers due to its (i) low cultivation cost and (ii) lower irrigation requirements, which was a boon in an El Nino year. Then the question is if MSP mustard has been set too high.
This issue is important because if the government notices that market prices are lower than the MSP, it might raise customs duties on imported edible oils to protect local farmers. However, if the MSP was set too high, then such a duty increase would tax the consumers who would end up paying more for edible oils as a basket.
There is another issue. Costs of farming vary widely across states, so the promised 50 per cent return over A2+FL costs is not always guaranteed. In states with higher cultivation costs, like Maharashtra and Rajasthan, the MSP for soybean in 2021-22 was below the promised return by 15 per cent and 49 per cent, respectively. Similarly, in Karnataka, the return on toor was only 8.4 per cent.
Then there is the deepening synergy between food, feed and energy. Maize is an important crop for the poultry industry, growing at double-digit annual growth rates. It is also going to be an integral feedstock in the country’s drive to achieve E20 (20 per cent ethanol blending with fuel). Its demand from the starch and the alcohol industries is also growing aggressively. So, setting the MSP for crops like maize, or rice or even sugarcane has to assess and align future demand from competing industries.
The way forward involves aligning MSP with current and future market needs, balancing domestic and global markets and addressing the needs of both farmers and consumers. CACP would need a robust mechanism for developing an outlook; one can’t just look back and predict the future. An MSP is technically a future price and, therefore, a credible assessment of the outlook is integral to the whole process of suggesting these prices. CACP needs to develop survey assessments to assess future demand in the country and/or globally, among other things. MSPs have to be set up to encourage the diversification of crops, especially towards pulses, oilseeds, and millets, which are crucial for the country’s nutrition goals.
Given climate change and varying resource-use efficiency, CACP could consider incentive packages, like a water-saving premium. For example, Punjab farmers who save electricity or switch from rice to maize could receive a premium above the MSP, tailored to specific crops or production techniques. This can be tailored to specific crops and/or production techniques for those crops.
This was first published in the 1-15 August, 2024 print edition of Down To Earth