Why the MSP regime isn’t clicking

Under Indian conditions, agriculture faces several risks — weather, production , quality and market, to name a few. While crop production is often seasonal and regional, consumption is round the year and across the country. Because of this, market prices usually tend to be volatile. For instance, prices tend to collapse during the harvest season glut and heavy arrivals.

So, in simple terms, the rationale for minimum support price (MSP) is the assurance of a minimum price that ensures the farmer recovers his cost of production and receives a decent return on investment. MSP is a kind of sovereign guarantee that farmers will not be allowed to suffer losses if crop prices fall below the specified minimum price.

Actually, MSP works as an options contract. If price were to fall below the specified MSP, the government has the obligation to purchase from farmers at the MSP. At the same time, the farmer is under no obligation to sell to the government if the price stays above MSP. In the event, the farmer is free to sell in the open market at price higher than MSP.

For arriving at the MSP, the Commission for Agricultural Costs and Prices (CACP) (formerly, Agricultural Prices Commission set up in 1965) undertakes an exercise every year examining the cost of production of select crops (numbering about 23), overall demand-supply, domestic and international prices, inter-crop price parity, terms of trade between agri and non-agri sectors, and so on.

Importantly, according to the government, the CACP also ensures rational utilisation of production resources like land and water. However, the CACP’s recommendations on MSP are not binding on the government. Although often accepted, the government occasionally tinkers with the recommended prices.

Ineffective instrument

Unfortunately, over the years, MSP has ceased to be an instrument to influence crop diversification or area allocation. Often, growers do not get to know the MSP as there are challenges relating to information dissemination; and when growers get to know, they do not care because it didn’t mean much to them.

What has the MSP regime achieved so far? Little. A majority of growers in the country do not receive the specified MSP (barring, of course, for wheat and rice that too in some States). No wonder, they are upset and disillusioned. And, the farm crisis is worsening.

There is a mistaken belief that higher MSP will translate to higher production. A look at past data will show the relationship to be tenuous at best. Clearly, MSP not backed by a robust procurement policy and associated logistics is doomed not to succeed, especially in the context of our production-centric approach. In the case of rice and wheat, grain mono-cropping and open-ended procurement at support price in agriculturally important States of Punjab, Haryana and Uttar Pradesh are leading to disastrous environmental impacts. Soil health has deteriorated and the water table has gone down to alarmingly low levels. Indeed, an ecological disaster is waiting to happen. What is the CACP doing?

Look at pulses. Acreage and production data of last 10-15 years will show weak correlation between MSP and production. Notwithstanding that, there has been a significant hike in MSP for pulses and without taking into account global and domestic market conditions.

Farmers’ angst

In 2016-17 and 2017-18, farmers responded with higher acreage not because of high MSP, but because of high open-market prices. And now, the same pulse farmers who rose to the occasion to harvest large crops are angry because of low prices and wholly inadequate procurement support.

Oilseeds are another glaring example of how MSP has failed. In crops where we face a shortage, growers should obviously benefit from high prices. Yet, oilseed prices have been ruling either below or close to MSP. So, the lesson is: MSP alone will achieve little. We need a holistic approach. Along with MSP we need a robust procurement system. We need an appropriate foreign trade (export/import) policy and tariff (Customs duty) policy in a way that will protect domestic growers without compromising the interests of consumers.

For our policy-makers, there is a lot to learn from the OECD experience. The OECD countries (30 of the wealthy industrialised nations) support agriculture with a humongous $500 billion a year. Of this, about $80-90 billion is invested in what is described as general services — agri infrastructure and innovation systems, inspection and control systems, market development, and so on. These are crop-neutral initiatives that seek to build lasting assets as well as scientific post-harvest systems.

In sum, we need an integrated approach to agriculture and food policies; and a lack of it will continue to result in uncertain output, suspect quality, price volatility and distorted markets.

The author is a global agribusiness specialist.

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