Farmers are back at the border of Punjab and Haryana, this time demanding a ‘legal guarantee’ for Minimum Support Price (MSP) calculated at C2 + 50 per cent as against the current formula of ‘cost (A2 + FL) plus 50 per cent’ . Experts are divided in their opinion. This article attempts to clarify a few issues related to the ‘legal guarantee’ and the implications of the C2 + 50 per cent formula.

At the outset, this writer acknowledges that farmers are in distress. The current agitation can be on account of this distress and the disenchantment with policymakers. The timing of the agitation can be debated. The earlier agitation against the farm laws prompted the government to constitute a Committee (July 2022) to broadly make suggestions to ‘make available MSP to farmers of the country by making the system more effective and transparent’. The committee is yet to submit its report. The promise of doubling farmers’ income seems to have gone out of the narrative. Farmers are obviously peeved. A few observations to begin with:

A legal guarantee is different from a legally mandated MSP. Guarantees are to be honoured by government(s) and mandates apply to all trade.

The current MSP regime applies to 23 crops (seven cereals, five pulses, seven oilseeds and four other crops) whose share in gross value of agricultural output (including poultry, livestock, fisheries and forest produce) is less than 30 per cent. The procurement at MSP is primarily of paddy and wheat. The others form a miniscule fraction of the total.

The current formula for calculation of MSP is (A2 + FL) + 50 per cent which is lower than C2 (comprehensive) costs (A2 is paid out costs and FL is value of family labour)

MSP has effectively become the procurement price for rice and wheat. The burden of procurement for physical distribution of foodgrains to 80 crore people would weigh heavily on policy options.

Now, the key issues

Legal guarantee for MSP: It can be argued that MSP itself is a guarantee by the government to ensure that prices do not fall below the minimum. Farmers have the option to sell their produce (23 MSP commodities, sugarcane has a different regime) to a designated government agency at MSP. There appears to be no case where government agencies have refused to buy at MSP from any farmer. It is true that States with slack and inefficient procurement machinery have not provided MSP support.

It is also true that rice and wheat, for reasons of food security, have dominated the procurement scenario. While about 85 per cent of the wheat comes from three States, 70 per cent of the rice comes from six States, with Punjab being the largest in both categories. Given the above context, what is meant by a legal guarantee for MSP needs clarity. If the idea is to move to a ‘rights based system’ as was done for the National Food Security Act, then a legal guarantee for MSP will only ensure that successive governments will not be able to remove the provision of MSP from the policy framework and the system will continue with modifications. This could give additional protection for the farmers in the form of a legislative backing for ensuring that the MSP regime continues. Will this continue for all the 23 crops or more or less is a different matter.

Guarantee or mandatory? If the interpretation of a ‘legal guarantee’ is that of a mandatory minimum price as obtains in the case of sugarcane, where sugar mills are required to buy and pay the government announced support price, this demand brings into play a new set of complexities. A mandatory minimum price means that no purchaser of these commodities can pay anything less than the declared price. Apart from the fact that this will distort the entire market, many small traders will find it impossible to operate. This would also mean that the government instead of being the buyer of last resort will become the first, and probably, the only buyer in the market. The dangers of such a system are well known. Another danger of any ‘mandatory’ provision is the likely proliferation of inspections and inspectors. The harassment and rent-seeking opportunities are too well known to merit description.

C2 plus 50 per cent: The third question is about the MSP being fixed at C2 + 50 per cent. A2 + FL is the current base for calculation. A shift to a C2 + 50 per cent formula could easily result in an increase between 10 and 45 per cent of the current MSP. This could impact not only the government budget, but family budgets as well.

Why only 23 crops? What arguments do we have to deny MSP to dairy & poultry farmers, fruit and vegetable growers etc who face higher risks in terms of climate, price and export policy and contribute to 70 per cent of the value of agricultural output? The infamous example of a state government which declared MSP for milk having to withdraw the scheme in a matter of ten days should serve as a lesson.

What are the costs?: This writer has seen come calculations by CRISIL and an earlier one by Vissa & Yadav. The details on the CRISIL calculation (2023) of an additional burden of just ₹21,000 crore (16 crops) are not readily available, while the second one, though based on 2017-18 data on MSP, market price and output, indicates a requirement of ₹47,700 crore (13 crops). It is noteworthy that Kiran Vissa and Yogendra Yadav (The Print, January 20, 2021) estimate an additional financial requirement of ₹2,29,000 crore for 13 crops if we were to move to C2 plus 50.

Both have used the market price-MSP differential as obtained in one year as the basis for their calculations and have assumed a certain percentage of marketable surplus that would be covered. The analysis seems to suggest a simplified ‘price differential payment system’. Physical procurement would be costlier by about 40 per cent going by FCI averages. Any government would find it difficult to commit to future financial outlays based on these uncertain variables. Therefore, the ‘true cost debate’ is unlikely to end soon!

Unarguably, farmers need better financial support. The economy will not be able to take frequent shocks in agriculture. The series of orders this year on stock limits and export bans are clear indications of the crisis. But knee-jerk reactions to multiple demands cannot be a solution. Governments (States and Centre) have to find comprehensive long-term solutions to the problems confronting farmers and their livelihoods, climate change, food inflation and the demands of food and nutrition security.

The writer is former Secretary Food & Agriculture, Govt of India