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Do farmers need an alternative to MSPs?

Only 32.2% of paddy growers and 39.2% of wheat farmers were aware of minimum support price (MSP), as per 70th National Sample Survey for 2012–13.

india Updated: Jul 26, 2018 09:35 IST
Zia Haq
Zia Haq
Hindustan Times, New Delhi
minimum support price,MSP,National Sample Survey
Farm incomes are said to be critically dependent on MSP-backed procurement programme. (PTI File Photo )

Agriculture everywhere needs to be bankrolled because of the nature of the beast. Farm subsidies are common across economies. For instance, the US government’s agriculture-support programmes cost taxpayers $20 billion annually, according to the 2015-16 US Government Accountability Office data.

The government mainly supports farmers by federally fixing minimum support prices (MSPs) for 24 crops apart from providing insurance, power and fertiliser subsidies. It then buys mainly wheat and rice at the MSP for distribution among the poor at a fraction of the buying price, which is estimated to cost Rs 1.69 lakh crore in 2018-19. Economists, including those affiliated to the government, are now debating if MSPs can adequately support farm incomes in the long run.

The Issue

A 2015 government think tank Niti Aayog paper titled ‘Raising Agricultural Productivity and Making Farming Remunerative for Farmers’ said the basic goal of price policy is to offer remunerative prices to farmers. But it said this cannot be “achieved through procurement backed MSP” because “it is neither possible nor desirable for the government to buy each commodity in each market in all regions”. This triggered the debate on MSPs.

MSPs have been “inadequate”, “ineffective” and “inefficient”, wrote economists T Haque and P K Joshi in a recent paper in the peer-reviewed academic journal the Economic and Political Weekly.

The cost of cultivation, to which MSPs are linked, widely varies across states. But MSPs are based on a weighted all-India average. This does not guarantee equal profits to all. The latest Organisation for Economic Co-operation and Development and Indian Council for Research on International Economic Relations study showed MSPs have often been set below international prices.

MSPs have also failed to keep pace with rising input costs.

For instance, taking into account comprehensive cultivation costs between 2004–05 and 2014–15, costs of growing paddy grew by 11.2% annually in Bihar and 11.9% in West Bengal, while the paddy MSP increased at the rate of 10.6% annually.

Significance

Farm incomes are said to be critically dependent -- at least in the case of rice and wheat -- on MSP-backed procurement programme. Yet, MSPs benefit very few farmers. Only 32.2% of paddy growers and 39.2% of wheat farmers were aware of MSP, as per 70th National Sample Survey for 2012–13. Crucially, only 13.5% rice farmers and 16.2% wheat farmers were able at MSPs.

Procurement of wheat is done mostly from Punjab, Haryana and Madhya Pradesh; while rice from Punjab, Chhattisgarh, Andhra Pradesh, Haryana. For majority of produce like maize, coarse cereals, soybeans and oilseeds, MSP is hardly backed by government procurement.

The Debate

Regardless of whether MSPs need to go or stay and if better alternative mechanisms should be found, farmers are always going to need a federally-determined price policy. The Niti Aayog paper has argued in favour of a price deficiency payment system, under which a subsidy is given to farmers when prices fall below a certain level, possibly an average of past three-four years. “This approach would help prevent unwanted stocks and spread price incentives to producers in all the regions and all the crops considered important for providing price support,” it states.

The price deficiency model, which Madhya Pradesh experimented with, may be attractive. But it, too, has a flip side. Traders manipulated the model. They colluded to artificially pull down prices. Economists such as Haque and Mishra say price deficiency payments can potentially be a better alternative only with “necessary safeguards and corrective measures”.

(This story is part of our series called Policy Dive, which picks a policy issue, traces the debate around it, the different schools of thought, and the choices involved.)

First Published: Jul 26, 2018 07:17 IST