The Minimum Support Price (MSP) has been the topic of conversation and heated debate across the country ever since the new farm laws were passed by the central government. The main cause of the rift between the farmers and the legislators stems from the fact that newly passed farm laws make no clear guarantee of an MSP which the farmers deem to be an essential part of protecting them from corporate exploitation under the new system which will allow produce to be sold outside of the traditional state-run mandis.
The minimum support price is an agricultural product price, set by the Government of India to purchase directly from the farmer. This is not enforceable by law. By definition, this rate is to safeguard the farmer to a minimum profit for the harvest, if the open market has lesser price than the cost incurred. The MSP has historically been used by the government as a safety net to protect farmers from a steep fall in agricultural prices, procuring a select type and amount of produce from farmers to boost and protect their incomes during such periods.
Anyone familiar with ECON 101 will know that this is akin to the price floors that we come across in our textbooks. In essence, the MSP lies above the market or ‘equilibrium’ price and going by pure economic theory such price levels should lead to excess supply and a shortage of demand, with the government stepping in to buy up the surplus from the farmers.
Presently, India’s agricultural markets are regulated by the states under the Agricultural Produce Marketing Committee (APMC) Act. This act gives the mandis exclusive rights to purchase the agricultural commodities through auctions mediated by Commission Agents (CAs). This system suffers from exploitation by
CAs, lower price realization for farmers, lack of transparency in the trading process, collusion among traders, price cartelization, delay in payments and low quality of mandi infrastructure. The traders have monopolistic control over the prices and political power backing them which leads to exploitation of the farmers. The Centre to reform this system passed the contentious Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020. This act allows for the agricultural commodities to be sold outside the APMC mandis without any jurisdiction or oversight by any governmental agency. The intent seems to be to promote a free market for trade in such commodities with fair market-determined prices as determined by the buyers and sellers.
Whether the scrapping of the mandi system will benefit farmers or just replace the bureaucratic exploitation with corporate exploitation is a complex issue requiring further analysis and study. However, it does make sense to look into the demand for a guaranteed MSP for the farmers which corporates and/or the state-run mandis would have to abide by.
As of now the government is not bound by law to buy at MSP from the farmers. The MSP list is released by the government biannually for 22 crops before their sowing seasons, based on suggestions by the Commission for Agricultural Costs and Prices (CACP), along with states’ views on the demand and supply situation. The policy has been used to win votes and elections, with the governments raising the rates during election years. Whether the government will be able to impose the MSP on private traders is also up for legal debate.
Most crops take about a year to be produced. Farmers allot their acreage armed with only the knowledge of the previous year’s demand for their crops and economists believe that an MSP will protect the vulnerable farmers from a sudden glut in demand for their crop. Additionally, if a hybrid system of private and public trade in agriculture were to coexist, the MSP would act as a signal price for the private traders in the market. Thus, some believe an expansion and reform in the current APMC mandi system is the ideal step to take.
Now, it may be well and good for politicians to form committees, appoint bureaucrats and come up with esoteric agricultural policies such as the MSP but imposition and execution of the same is a different story. According to a 2015 report by the Shanta Kumar Committee only 6% of farmers succeed at selling their crop at the MSP. The prices are determined centrally, but the costs vary greatly in different states due to different wage rates prevalent in the states, so a central price fails to even cover the cost of production for farmers in some instances. It is also worthy to note that these issues also mean that it is unclear whether the MSP helps in boosting farmers incomes.
Thus, the jury is still out on whether the distortion in market prices caused by the MSP and the abysmal implementation of the same is reason enough for the government to abolish the practice. A safety net for farmers is extremely important as about half of India’s working population is dependent on agriculture with 86% of them being small cultivators. Alternatives such as direct income support instead of the MSP have been proposed in the past and are progressive policy options.
It will now be up to the government and farmers to reach a common ground to introduce reforms to benefit the agricultural sector.
That’s all for this week! We hope you liked it and would love to know your thoughts in the comment section. This article is written and curated by Saharsh Jindal.