The demands of the protesting farmers of Punjab and Haryana are multifaceted, with the primary focus being on securing a legal guarantee for minimum support prices (MSPs). Despite being a long-standing demand, there remains ambiguity regarding its precise implications. This lack of clarity has fuelled fear-mongering, with exaggerated concerns raised about the fiscal implications and potential monopolisation of agricultural trade. Similar apprehensions were raised during the implementation of the National Food Security Act and the National Rural Employment Guarantee Act, yet neither of these legislation resulted in government bankruptcy.

MSP serves as a straightforward mechanism aimed at ensuring price stability for essential agricultural commodities. Its primary purpose is to shield farmers from the fluctuations in prices through government interventions. It has been in existence in India for more than five decades. Why, then, are farmers asking for a legal guarantee? Are the farmers being irrational in demanding a guaranteed MSP?

It is crucial to emphasise that farmers often do not receive a fair share of the returns from the seemingly high prices at which their produce is sold. Urban consumers, particularly among higher-income groups, are often willing to pay more. This scenario perpetuates middleman profiteering at the expense of farmer welfare. Therefore, farmers in rural areas require greater protection through price-based mechanisms like MSP to mitigate these inequalities.

Conflicting views

Meanwhile, many experts caution against enshrining the MSP into law. They argue that it would essentially mean that no one could purchase crops below their MSP, potentially disrupting market dynamics and inadvertently harming farmers in the long run.

The concern revolves around the fundamental principle that prices are primarily determined by the interplay of demand and supply dynamics. During times of surplus, such as harvest seasons, prices naturally decline to balance the market. If the MSP exceeds this market-clearing price, private buyers may be unwilling to purchase the produce. Consequently, the burden falls on the government to step in as the buyer of last resort. Failure to do so could leave farmers without buyers for their crops, exacerbating their already precarious situation. Thus, while the intention behind legalising MSP may be to safeguard farmers’ interests, the practical implications could inadvertently lead to adverse outcomes, they argue.

Another concern surrounding the legalisation of MSP is the apprehension regarding the fiscal burden required to uphold such a guarantee. Large figures to the tune of ₹10-18-lakh crore have been floated. Most of these assumptions are based on a poor understanding of agricultural markets or the role of MSP in stabilising prices.

The notion that implementing a guarantee for MSP would necessitate the government to procure all agricultural produce is flawed for two primary reasons. First, not all agricultural produce is sold in the market; farmers keep some for self-consumption, seed, and livestock feed. Hence roughly only a fraction of the produce is available in the market, generally referred to as the marketable surplus. Second, even with a marketable surplus, government intervention is warranted only when the market price of a commodity drops below the MSP. However, intervention is needed only to the extent that it generates excess demand and lifts market prices, often affecting only a fraction of total market arrivals. In periods of high market prices, government intervention is unnecessary.

The way forward

MSP is not merely a government handout but rather the bare minimum necessary to safeguard the peasantry from devastation and destitution. It functions as an insurance policy against uncertainties. A guaranteed MSP offers a good opportunity to rectify the imbalances in the MSP and procurement system. The existing procurement framework is confined to specific geographical regions and is primarily focused on rice and wheat. To mitigate regional imbalances in agricultural productivity, there’s a pressing need for a more diversified and expanded MSP that encompasses a wider range of crops. Such an approach would not only bridge regional disparities but also stimulate investment, expansion, and enhancement of storage management practices. Additionally, it would facilitate crop diversification, crucial for effective natural resource management.

Using an income policy on a per-hectare basis to directly transfer funds into farmers’ accounts could be a more effective approach than relying solely on higher MSPs or procurement-driven policies. Improving transparency in land records can aid in accurately identifying tenants and landowners, enhancing the efficiency of this income transfer mechanism.

The writer is Associate Professor in Economics, VIT Chennai