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Minimum Support Price

  Feb 23, 2023

Minimum Support Price

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.