The question of MSP: Is income support for farmers better than pricing that is delinked from market demand?

Context- Farmers primarily operate in a buyer’s market, where their crops are harvested and sold in bulk. This often leads to a sudden increase in supply compared to demand, causing a drop in prices. These market conditions favor buyers over sellers, making farmers price takers rather than price makers. They lack the power to influence the prices of their produce or set the maximum retail price (MRP), selling instead at rates determined by supply and demand.

Additionally, while their crops are sold wholesale, farmers pay retail prices for everything from seeds and pesticides to diesel and tractors. Consequently, farmers periodically demand minimum support prices (MSP) for their crops. As the Lok Sabha elections approach, there may be calls for parties to include a “legal guarantee for MSP” in their manifestos.

Price versus income support

  • Most economists oppose government-fixed Minimum Support Prices (MSPs) that are based on cost-plus pricing without considering market demand.
  • They argue that farmers should plant crops reflecting market demands and prices. MSPs that ignore demand conditions can distort farmers’ production decisions, leading to oversupply of some crops and undersupply of others.
  • Economists generally favor providing farmers with “income” support rather than “price” support. This involves transferring a fixed sum of money annually into their bank accounts, either on a per-farmer or per-acre basis.
  • Direct income support schemes are not market-distorting and benefit all farmers, regardless of the crop they grow, the quantity they produce, and the price at which they sell.
  • However, this approach raises the question of how it affects the real producing farmers who invest more resources, time, and effort in the field.
  • These farmers, for whom agriculture is a primary livelihood source, may seek price assurance for their crops. Given their exposure to both price and production risks, an MSP guarantee may not be an unreasonable demand.
  • Moreover, price support can promote crop diversification. Farmers are more likely to grow nutrient-dense, less water-intensive crops like pulses and millets instead of rice, wheat, or sugarcane if they are assured of MSP. As long as MSPs do not deviate excessively from market rates and maintain inter-crop price parity, it’s a viable option.

How can MSP be guaranteed?

  • There are two traditional methods to ensure farmers receive the Minimum Support Price (MSP). The first is to legally require buyers, such as sugar mills, to pay a “fair and remunerative” or “state advised” price within 14 days of purchase.
  • However, this method can face implementation challenges and may deter private trade. The second method involves government agencies buying all marketable produce offered at MSP, which is unsustainable both physically and fiscally.
  • A third option is Price Deficiency Payments (PDP), where the government pays farmers the difference between the market price and MSP if the market price is lower. This payment is made on the quantity of crop sold to private trade, without the government physically purchasing or stocking any crop.
  • PDP was first implemented in Madhya Pradesh through the Bhavantar Bhugtan Yojana. Under this scheme, the market price for a crop was its average modal rate in the Agricultural Produce Market Committee (APMC) mandis of Madhya Pradesh and two other growing states during the month of sale.
  • The price difference vis-à-vis the MSP was payable on the actual quantity sold by the farmer, backed by a sale agreement with the trader, a weighment slip, and a payment letter signed by both parties.
  • The scheme was implemented during the 2017-18 kharif (post-monsoon) season for eight crops. Despite registration by about 21 lakh farmers and payments of about Rs 1,952 crore, the scheme could not be continued due to lack of Central support.

A model in Haryana

  • Haryana’s Price Deficiency Payments (PDP) scheme, known as Bhavantar Bharpai Yojana (BBY), is primarily implemented for bajra (pearl millet), mustard, and sunflower seed, but technically also covers groundnut, chana (chickpea), moong, and 19 types of fruits and vegetables.
  • Farmers register on the ‘Meri Fasal, Mera Byaura’ portal with details of their land and crops. Registration for kharif crops is open from June to August, and for rabi crops from November to February. After registration and crop area verification by officials, farmers are eligible to receive the Minimum Support Price (MSP) via BBY.
  • Haryana has chosen a mix of physical procurement and PDP under BBY. In 2020-21, the state government directly procured 776,909 tonnes of bajra and 16,952 tonnes of sunflower at MSPs of Rs 2,150 and Rs 5,885 per quintal respectively. In subsequent years, Haryana has used both methods, depending on the gap between the MSP and market price.

So what is the road ahead?

  • Madhya Pradesh and Haryana have shown that it’s feasible to deliver Minimum Support Prices (MSP) to farmers for crops other than rice, wheat, and sugarcane. This has been possible due to the existing Agricultural Produce Market Committee (APMC) mandi infrastructure and farmer registration systems in these states.
  • These systems allow for recording each transaction – the quantity of any crop a farmer has sold at a certain price – and paying the difference between the market price and the MSP.
  • If a nationwide Price Deficiency Payments (PDP) scheme with 50% Central funding were implemented, it could incentivize other states to follow the examples of Madhya Pradesh and Haryana. This could lead to the development of market infrastructure and systems that would enable farmers in these states to receive MSP, either by law or otherwise.

Conclusion-  The implementation of Minimum Support Prices (MSP) and Price Deficiency Payments (PDP) in states like Madhya Pradesh and Haryana has shown promising results in ensuring fair compensation for farmers. These schemes, backed by robust Agricultural Produce Market Committee (APMC) infrastructure and farmer registration systems, have demonstrated the feasibility of delivering MSP for a variety of crops.

However, the sustainability and effectiveness of such schemes require further exploration and careful consideration of market dynamics.


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