Commodity Commentary. What purpose MSP for crops?

That the announcement of minimum support price (MSP) for various crops has become a ritualistic exercise over the years has yet again been confirmed by the recent Cabinet decision to hike the MSP for the 2021-22 Kharif season crops.

The specific purpose of the price hikes and intended outcomes are not clear. The aim of MSP ought to be to send a signal to growers that they take a call on what crop to grow, assure them of a minimum price and encourage a shift from one crop to another where needed.

In India, agriculture is subject to several risks. Crop cultivation is seasonal and regional in nature. The output market tends to be volatile. During the harvesting season, produce prices tend to collapse. MSP provides assurance of a minimum price so that the farmer recovers his cost and also gets a decent return on investment.

This author firmly believes that MSP should actually act as a sovereign guarantee given by the government to farmers that they will not be allowed to suffer losses if prices fall below the specified support price. If this is not the case, MSP loses its sanctity.

Importantly, MSP is an options contract where the government is the Options seller and the farmer the Options buyer. In the event, the government is obliged to buy from farmers if the price falls below MSP; but at the same time, the farmer is under no obligation to sell to the government if the price rules above MSP and is free to sell in the open market.

Implementation skewed

Implementation of the MSP policy is skewed. Rice and wheat garner all the attention, while other crops, including coarse cereals, oilseeds and pulses, often languish. If MSP is not backed by a robust nationwide proactive procurement system, it is doomed to fail in a production-centric approach.

Focus on rice and wheat has created its own economic and ecological challenges. As a nation we cannot any more ignore the ecological disaster waiting to happen because of grain mono-cropping in the country’s breadbasket and open-ended procurement.

MSP has to take into account domestic and global market conditions. Higher MSP is no guarantee that growers will benefit as other attendant policies – exim trade, customs tariff and consumption – negate the impact. Pulses are a good example. We attempt to produce more, but do little to boost consumption.

The case of oilseeds is tragic. As a crop in chronic short supply, growers ought to benefit immensely. Yet, oilseed prices have more often than not ruled below the specified MSP and has distressed growers. Clearly, the unimaginative trade and tariff policy for vegetable oils negates the purpose of higher MSP.

It’s time the silo mentality among various ministries – Agriculture, Food, Consumer Affairs, Commerce – is replaced by a holistic approach that takes a comprehensive view of the agriculture sector, including production, consumption and trade.

(The author is a policy commentator and agribusiness specialist. Views are personal)

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