Although the farmers’ agitation that lasted over one year was finally called-off, their demand for a law guaranteeing minimum support prices (MSP) for crops is continuing. Can the MSP be legalised in a country that produces about 1,000 million tonnes of agri-commodities? If so, who will benefit from it? What will be the cost of such a scheme? Are there alternative options?

The Centre has been announcing MSP for crops every year for two seasons — kharif and rabi — since 1965, based on the recommendation of the Commission for Agricultural Costs and Prices (CACP). Initially, it was announced only for wheat and paddy. Over the years, more crops were added. The MSP is currently offered for 23 crops. Historically, the MSP is determined based on the cost of cultivation, input prices, supply and demand of crops, the price level in world markets, etc.

Although the CACP uses nine different cost concepts (A1, A2, A2+FL, B1, B2, C1, C2, C2* and C3) for estimating the cost of production, the MSP was fixed based on cost A2+FL formula till 2018. While the cost C3 includes all the expenses incurred for crop cultivation, A2 covers only the farmer’s out-of-pocket spend on cultivation. That is, cost A2+FL (family labour) does not take into account the depreciation cost of farm machinery, the interest on loans, etc. Therefore, the gap between C3 and A2+FL cost is 30-50 per cent for most mandated crops.

In such a scenario, crop production becomes unprofitable for farmers. So they are demanding MSPs that cover the full cost of production. MS Swaminathan-headed Farmers’ Commission (2006) recommended that MSPs for crops should be fixed at 50 per cent higher than the cost of production. Given the continuous demand from farmers, the government made a historic announcement in Budget 2018-19 that the MSP will be fixed at least one-and-half times the cost of production.

Since kharif 2018, the MSP is are fixed based on cost A2+FL plus 50 per cent formula. However, even after making this unprecedented rise in MSP, farmers allege that income from crop cultivation is grossly inadequate. This is mainly due to poor procurement, which is essential for availing the MSP.

Defective procurement:

Procurement has been poor over the years except for paddy and wheat. Even in paddy and wheat, not all States have benefited from procurement. The total quantity of paddy procured during kharif 2020-21 was 601 lakh tonnes (lt). Of this, 174 lt were procured from Punjab and Haryana. That is, about 29 per cent of the money spent on paddy procurement went to just these two States. Similarly, about 52 per cent of the money spent on procuring wheat went to these two States. Can this skewed procurement help farmers of other States?

The procurement is not linked with crop production of different States. In 2018-19, Punjab’s share in paddy production was only 11 per cent, but its share in procurement was 25.53 per cent. West Bengal’s share in procurement was only 4.46 per cent, while accounting for 13.94 per cent of paddy production. Similarly, Tamil Nadu accounted for 5.26 per cent of paddy production, but its share of the procurement was only 2.91 per cent.

So, paddy growing farmers in most States may have sold their crops to private traders below the MSP. This is also reinforced by the data of the Situation Assessment Survey (SAS) of farmers in 2018-19 that underlined only about 17 per cent of farmer households sold paddy to procurement agencies. If procurement of crops is linked with their production of each State, most issues concerning MSP will go away automatically. So what is stopping the linking of procurement with production?

Alternative options

Though elite farmers believe that legalising MSP will benefit them, it can create serious ramifications. Some estimates suggest that it will cost annually about ₹17-lakh crore for purchasing the 23 mandated crops.

Also, if the MSP is legalised, there will be a demand to include other crops, particularly fruits and vegetables, whose current production is about 320 million tonnes. Dairy farmers may also demand an MSP for milk and other products. Therefore, the cost of procurement under the MSP will be unimaginable, and increase every year considerably. Moreover, it will mostly benefit farmers owning over 2 hectares of land.

The issue of legalising the MSP arises mainly because of the exploitation by middlemen and private traders. Often, farmers do not get even 70 per cent of the MSP for their produce from the private traders. This is reinforced by the CACP data, which shows that the market prices rule below the MSP for most mandated crops. Therefore, the government should bring a law with the condition that no crop can be purchased by private traders or agencies below the MSP. This will eradicate most of the issues revolving around MSP.

Second, the SAS data of 2018-19 suggests that the awareness about the MSP-based procurement is poor. This might be higher among marginal and small farmers, who constitute 86 per cent of all farmers. As a result private traders and middlemen exploit farmers by setting lower prices. To stop this, the government can bring a law on “right to sell at MSP by marginal and small farmers”, with a carefully designed methodology.

The third option relates to procurement. Per SAS data of 2018-19, the number of farmer households that sold their crops to procurement agency is only around 5 per cent in most crops (see Figure 1). With this low procurement, how can the farmers avail themselves of the MSP?

The Shantha Kumar Committee (2015) report not only questioned the undue importance given to the procurement of paddy and wheat but suggested widening the procurement scheme.

If 20-25 per cent of crops’ production is procured, the excess supply flow into the market can be reduced which will increase the market prices benefiting all farmers.

Even if the MSP is legalised, there is no guarantee that it will help increase the farmers’ income because the methodology followed for estimating the cost of production is outdated and defective.

While every effort is needed to fix the MSP based on the true cost of production, there is also a need to reduce the cost of cultivation which has skyrocketed particularly after the introduction of MGNREGS.

The writer is a former full-time Member (Official), Commission for Agricultural Costs and Prices, New Delhi. The views experssed are personal

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