Q What is the context ?
A There has been debate on the issue of MSP with some arguing against it while some favouring it.
Q What are issues with MSP ?
- The broad strands of argument against MSP are:
- MSP hinders the price discovery: Providing MSP does not allow the market to discover the prices; if market cleared prices are less than MSP, then the only buyer would be the government; this would render the government bankrupt.
- FPO as a mechanism to deal with markets: If markets have any distortions, the way to negotiate it is through Farmer Producer Organisations (FPOs) — as demonstrated by Amul.
- Provide income support through DBT: A better way to address the possible income gap is to give an income support-based direct benefit transfer (DBT).
Q Why MSP is necessary?
1] Barriers in agri-markets
- Through tariffs and other measures, we have built a national barrier on markets, where gates are opened on the basis of strategic intent.
- If we were to open our borders for free movement of grains from elsewhere, we may even argue for unlocking agricultural land for more lucrative purposes without worrying about food self-sufficiency, buffer stocking and domestic food safety.
- We may have to accept a national food safety for at least the essential foodgrains and pulses.
2] Role of MSP as price signalling and why it needs to be given as legal guarantee
- Disproportionate risk: If we were to look at farming, we realise that this exposes itself to disproportionate risks.
- First, there is no stop-loss mechanism after sowing the seed, except for destroying the crop for the season.
- This enterprise not only has the usual business risks but also has the enhanced risk of the force majeure elements that destroy the enterprise — a sudden hail storm, drought, unseasonal showers, a pest attack, a locust attack — there are too many things that the farmer cannot control.
- Therefore, an MSP provides a powerful signal to the farmer to exercise the choice of sowing a particular crop because the farmer can back-calculate the expected margin.
- If MSP is a signal that helps the farmer to choose a crop, then it must remain a choice at the harvest time as well.
- The significance of MSP is only when the markets do not clear the price.
- In such a situation, the farmer gets a return less than the MSP and by this argument we are escorting the farm fraternity towards bankruptcy.
- A legal guarantee is, therefore, needed.
- The argument that the state will have to procure all the floating stock in the market and may become bankrupt is fallacious.
- The intervention of the state in the markets usually covers information asymmetry, arbitrage and cools the markets when they get overheated.
Q Why not opt for income support instead of MSP?
- Income support does not address the issue of viability of the farming operations.
- There is no doubt that we need to make farming viable.
- It is important to address the prices of each crop as a strategic signalling mechanism: For crops that would be encouraged and those that would be discouraged.
Q What are issues with drawing parallels with AMUL ?
- While the Amul model recognised the inherent power of markets, it took about five decades to make the system competitive — the investments were made in breed improvement, free veterinary services, better cattle feed, capital subsidy for processing plants, and return-free capital as investments.
- The nature of subsidies was smart and innovative.
- Dairying was the last bit to be liberalised, and it enjoyed protection even when we opened up in 1991.
Q What can be Way forward ?
- Modernise the markets: We need to modernise the markets and storage and processing facilities.
- There is no point in conflating modernisation with liberalisation.
- Investment: If we need to take Indian agriculture on the path of Amul, we need to start making those investments now.