GS Paper II & III

News Excerpt:

A study revealed that out of approximately 93 million farmers in India, only about 9% reported selling their produce at Minimum Support Price (MSP) (2018-19 data).

• Small and marginal farmers made up 75% of these beneficiaries, accounting for around 42% of the total MSP sales value.

The Impact of MSP

• Despite its limited impact, MSP has provided a floor price for procured crops in states where the government procures, influenced farmers' crop choices, and triggered policy actions when mandi prices fell below MSP.
• For example, a 14% increase in MSP for gram in 2016-17 led to a 33% increase in production.
• Similarly, increases in MSP for toor (pigeon pea) and urad (black gram) resulted in significant production growth.
• To support important crops like pulses, the government opened MSP-buying through agencies like the National Agricultural Cooperative Marketing Federation of India Ltd (NAFED).
• Predominantly, crops like sugarcane, paddy, wheat, and cotton benefited from MSP.
• Geographically, most MSP beneficiaries were from Chhattisgarh, Uttar Pradesh, Madhya Pradesh, Telangana, Punjab, and Haryana.

Issues with MSP Calculations

• There are three primary reasons why MSP is out of sync with market dynamics.
• Lack of Sufficient Data
• Lack of sufficient data complicates MSP estimation. Without reliable data, it is challenging to estimate demand and required supply accurately.
• The latest National Sample Survey Office data (2022-23) was released after a ten-year gap, making it difficult to align MSP with current market realities.
• Leads to inflation
• MSP increases can drive up inflation. For example, a 10% increase in MSP for moong (green gram) in the 2023-24 marketing year would likely lead to higher costs being passed on to consumers.
• Imported Commodities
• MSP for imported commodities needs to be in line with landed import costs. The same metrics cannot be used to estimate MSP for both net-exported commodities like rice and imported ones like soybean oil.
• If global prices for soybean oil drop, cheaper imports could replace locally produced soybean oil bought at MSP, leading the Indian government to increase customs duties to protect local farmers. However, this would raise prices for consumers.

Rethinking MSP Calculations

• The recent protests advocating for the legalization of MSP have brought to light the complexities involved in determining a fair price for farmers' produce. 
• While the government currently provides MSP for 23 crops, the remuneration often falls short of making farming a profitable venture.
• Agriculture and market experts suggest that the Commission for Agricultural Costs and Prices (CACP) needs to reconsider how it calculates the cost of agricultural produce to ensure fair pricing for farmers without exacerbating the already rising food inflation. 
• There is also a growing emphasis on aligning MSP with the country's broader economic goals and climate variations.

Inflation and Government Policies

• Inflation, particularly food inflation, is a key concern for everyone, from policymakers to households.
• The Reserve Bank of India (RBI) stressed the importance of maintaining inflation within a specified range (4% +/-2%) as critical for the country.
• When inflation deviates from this range, both central and state governments implement various programs and policies to influence the prices received by farmers and paid by consumers.
• The MSP, Essential Commodities Act, 1955, and the public distribution system under the National Food Security Act, 2013, are among the central policies that impact agricultural commodity prices.
• Additionally, policies on global trade, such as customs duties, minimum export prices, and export duties, play a role in shaping domestic prices.

Way Forward

• The path forward involves aligning MSP with current and future market needs, balancing domestic and global markets, and addressing the needs of both farmers and consumers.
• The CACP should develop a robust mechanism for forecasting demand, considering future market trends rather than relying solely on historical data.
• MSPs should be set to encourage crop diversification, particularly towards pulses, oilseeds, and millets, which are vital for the country's nutrition goals.
• Given the challenges posed by climate change and varying resource-use efficiency, the CACP could consider incentive packages, such as a water-saving premium. For instance, farmers in Punjab who save electricity or switch from rice to maize could receive a premium above the MSP.