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Why legal guarantee for MSP — the other demand of protesting farmers — is a lose-lose proposal

After the repeal of farm laws, protesting farmers now want govt to make MSP a legal guarantee for all 23 crops covered under the safety-net framework.

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New Delhi: Protesting farmers are refusing to return home, even after Prime Minister Narendra Modi has promised to repeal the three contentious farm laws.  

They have now written to the Prime Minister, stating that they will continue their protest for other demands, chief among them the legal guarantee for Minimum Support Price (MSP). 

MSP is the minimum price safety net provided by the government to farmers. It is through MSP that the government procures farmer produce to give them a guaranteed price, along with an assured procurement market. 

As of now, the central government, on recommendation of the Commission for Agricultural Costs & Prices (CACP), declares MSP for 23 crops — paddy, wheat, maize, sorghum, pearl millet, barley, ragi, gram, tur, moong, urad, lentil, groundnut, rapeseed-mustard, soybean, sesamum, sunflower, safflower, niger seed, copra, sugarcane, cotton and raw jute.

Without the legal mandate, the government is under no obligation to procure the 23 crops under MSP. 

In its current form, the MSP-based procurement system is aimed to save the farmer from scenarios of price fluctuation such as bumper crop leading to a glut in the market, climate vagaries, lack of information for the crop produce value, among others.

How can the government provide legal guarantee for MSP? 

Primarily, there are two ways that the government can provide legal guarantee for MSP, both with severe economic repercussions.

Firstly, the government can declare MSP as the baseline price for the 23 crops in the market. It’ll be a mandate for private players to pay MSP rates, which may lead to price rise. 

Secondly, the government itself can buy all 23 crops at MSP.  Currently, multiple government agencies such as the Food Corporation of India (FCI), National Agricultural Cooperative Marketing Federation of India (NAFED) and Cotton Corporation of India (CCI), among others, procure large quantities of wheat, paddy or rice, pulses and cotton at MSP from farmers to provide price support, especially in case of a glut when market prices fall below MSP. 

Also read: Farm laws repeal a chance to build consensus, it’s a bad idea to stop reform train, say experts

How does this affect the government agencies?

The government agencies, at their very best, are still able to procure just 30 to 40 per cent of the total crop production of one crop at MSP. And they have to achieve this with skyrocketing carry-forward stocks, as well as soaring procurement, handling, storage and other miscellaneous charges.

In the 2019-20 season, for instance, the FCI procured 77.34 million tonnes (MT) of paddy and 38.99 MT of wheat, worth roughly around Rs 2,15,894 crore at MSP. In 2020-21, this shot up to Rs 2,53,274 crore. 

While the whole procurement to handling, storage and distribution affair of these foodgrain costs well above Rs 20/kg, which is the MSP of these crops (Wheat: Rs 20.15/kg; Paddy: Rs 19.60/kg), the procured stock is distributed at an extremely subsidised rate of Rs 2-3/kg to the poorest section of society under the PDS and other such schemes.

Farmer leader Anil Ghanwat, a member of the panel set up by the Supreme Court to study the farm laws, told ThePrint that making MSP a legal guarantee will entail huge costs.

“The demand to legally guarantee MSP to 23 crops will drive the country to bankruptcy as the Centre or state, whoever procures and pays for crops at MSP, will go bankrupt,” he said. “All the revenue will be diverted toward this and there will be no money left with the government to develop and maintain essential things like roads, bridges etc.”

“If the MSP is made legal for the 23 crops, soon, other farmers will also come up with the demand for their crops such as fruits and vegetables,” he added. 

“Due to the existing MSP regime, the government procures 110 lakh tonnes of wheat and paddy, even though it has a buffer stock norm of just 41 lakh tonnes. The rate of procurement and the stock is also bulging up in the case of all other crops among the 23 MSP ones.”

What are the other issues with MSP guarantee?  

Another chief problem with MSP as a legal guarantee is that it could compound the government’s efforts to ensure storage of the procured crop. 

The stock of foodgrain procured at MSP — such as wheat and rice — in the central pool is often more than double the minimum buffer stocks norms. According to buffer stock norms, in October this year, the stock in the central pool should have been 257.70 lakh tonnes but it was 721.78 lakh tonnes. 

Similar is the case for all other crops among the 23 eligible for MSP. For example, in the five-year period between 2014 and 2019, NAFED procured 91 lakh tonnes of oilseeds and pulses at MSP, at an increase of 1205 per cent as compared to the 7.02 lakh tonnes it procured between 2009 and 2014.   

With increased foodgrain production on the one hand and cost of procurement at MSP and handling (storage, packing and distribution) on the other, the government has been left with burgeoning bills. 

Furthermore, according to the first method, if the government decides to set MSP as a baseline price for those 23 crops, it’ll push retail and wholesale prices on the higher side while alienating it from the market equation of demand and supply, causing inconvenience to consumers. 

This is also likely to hurt the agriculture export sector in the country, which has been one of the rare silver linings of the economy during the Covid-19 pandemic. 

In 2020-21, India’s farm exports soared to a six-year record high. This growth in exports rode on India’s foodgrain availability at a lower rate in the market against other exporting nations. Most of the exported foodgrains were supplied from major producing states such as UP, Bihar, West Bengal, Gujarat and Rajasthan. 

While these states are major producers of wheat and rice, procurement done by the government at MSP remains minimal leading to farmers selling their produce at market prices making it viable for exports.

Explaining the vulnerabilities of the MSP regime, economist Ila Patnaik, a professor at the National Institute of Public Finance and Policy, said, “In any system where prices are fixed by the central planner, it leads to misallocation of resources. Then the prices are set not by what people need and are willing to pay for.  The market is good at deciding the price of commodities because it reflects people’s demands.”

She added that, in case of MSP, in addition to output prices, various input costs such as power, water, fertiliser are already being determined by the government. 

“This leads to bad allocation of resources in the economy. This leads to stockpiles of food that you don’t need and shortages of ones that you need instead,” she said. “For example, if you allocate more resources to wheat, dal doesn’t get enough resources and its prices go up.  Demands change as people’s income changes but central planners will be able to move prices accordingly.”

Also read: Flat prices, late payments, rising costs — why western UP’s sugarcane farmers are in crisis



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