15 Oct

MSP

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Content

• What is MSP? 
• How is MSP decided and who takes final decision
• Crops Covered under MSP
• Pradhan Mantri Annadata Aay Sanrakshan Abhiyan (PM-AASHA)
• Government’s Subsidy Expenditure

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What is MSP? 

It is the minimum price set by the Government at which farmers can expect to sell their produce for the season. When market prices fall below the announced MSPs, procurement agencies step in to procure the crop and ‘support’ the prices.
Beginning: The Minimum Support Prices (MSP) were announced by the Government of India for the first time in 1966-67 for Wheat in the wake of the Green Revolution and extended harvest, to save the farmers from depleting profits.

How is MSP decided and Who takes final decision?

• The Cabinet Committee of Economic Affairs (CCEA) announces MSP for various crops at the beginning of each sowing season based on the recommendations of the Commission for Agricultural Costs and Prices (CACP).
• The CACP takes into account demand and supply, the cost of production (A2 + FL method) and price trends in the market, inter-crop parity, implication for MSP on consumers, a minimum of 50% as the margin over cost of production; etc.
• The CACP calculates three types of costs — A2, A2+FL and C2 — for each mandated crop for different states. The lowest of these costs is A2, which is the actual paid-out cost incurred by a farmer. Next is A2+FL, the actual paid-out cost plus imputed value of family labour. The highest of the three costs is C2, defined as ‘Comprehensive Cost including Rental Value of Own Land (net of
  land revenue and interest on value of own fixed capital assets (excluding land).
• MSP is announced for 22 mandated crops and FRP is announced for sugarcane (total 23 crops)

Crops Covered under MSP:

MSP is announced for 22 mandated crops and FRP for Sugarcane. (Total 23 crops)

• Mandated Crops are: 14 crops for Kharif season, 6 Rabi crops (except Toria) and 2 crash crops (Copra and Raw Jute).
• In addition MSP for Toria and De husked coconut are fixed on the basis of MSP for rapeseed/mustard and Copra.

Note: Coffee, tea etc are not covered under MSP.

• 7 Cereals, 8 oilseeds, 5 pulses, 5 cash crops – Copra, Raw cotton, Raw Jute, Virginia Flu cured (VFC) tobacco, Sugarcane.
  Note: For Sugarcane Fair and Remunerative Prices (FRP) is announced that has to be paid by sugar mill owners.
• Kharif Crops:  Paddy, Jowar, Bajra, Maize, Ragi, Arhar(Tur), Moong, Urad, Cotton, Groundnut, Sunflower seed, Soyabean Black, Sesamum, Nigerseed.
• Rabi Crops: Wheat, Barley, Gram, Masur/lentil, Rapeseed/ mustard, Safflower, Toria (an oilseed similar to rapeseed)
• Other Crops: Copra/ Dehusked Cotton, VFC Tobacco, Raw Jute, Sugarcane                

Need of MSP/ Rationale Behind MSP

• Protecting farmers from price volatility
• Incentivizing farmers to grow crops in short supply
• MSP also ensures easy procurement for food security schemes

From FY19 the MSP has been pegged at more than 50% of cost of production for most of the Kharif and Rabi crops. This is another step towards ensuring income inclusiveness.

• Accordingly, the Government has been increasing the MSP for all 22 Kharif, Rabi and Commercial crops with a margin of at least 50% over the all-India weighted average cost of production since the agricultural year 2018-19.

Various Mechanisms under MSP to procure crops and ensure remunerative prices for farmers (Before PM-AASHA)
1. For wheat and paddy -> Open Ended Procurement by FCI
2. Coarse Grains -> Purchased by state government with permission of central government, upto the extent it is required in their Target Public Distribution System (TPDS).
3. Price Support Scheme (PSS) – for oil seeds, pulses and cotton – at the request of concerned states
4. Market Intervention Scheme (MIS) for perishable horticulture commodities – at the request of states – when there is excess supply or low prices.

Some shortcomings in MSP Procurement Program

• Procurement is limited to few crops, few geographies and few farmers -> only wheat and rice under open procurement -> Punjab, Haryana, Coastal Andhra benefitted a lot -> mostly big farmer benefitted
• There has been delays in establishment of procurement centre.
• Lack of awareness about MSP among large section of farmers. This leads to they getting exploited at the hands of commission agent.
• Inadequate MSP (MSP calculation is not based on A2 + FL + C2 which was recommended by MS Swaminathan committee). It uses A2 + FL method.

Pradhan Mantri Annadata Aay Sanrakshan Abhiyan (PM-AASHA):

•  The scheme is aimed at increasing the MSP procurement of pulses, oilseeds, COPRA etc. This is expected to ensure remunerative price to farmers.
• Three components of PM AASHA – Price Support Scheme; Price Deficiency and Payment Scheme; and Private Procurement & Stockist Scheme
  Note: For Oilseeds, the states will be allowed to choose between the PSS or two other
  schemes.
  Note: AASHA is complementing (not replacing) complementing other schemes
  • Other existing schemes of Department of Food and Public Distribution (DFPD) for procurement of paddy, wheat and nutri-cereals/coarse grains and of Ministry of Textile for Cotton and Jute will be continued for providing MSP to farmers to these crops.

What was expected out of PM-AASHA:
Better remuneration for farmers; reduced storage and procurement requirement for government; increased private participation -> more investment in storage etc; improved food security.

But, PM-AASHA has also not been able to increase MSP procurement a lot due to following reasons:

• Budgetary support for PM-AASHA has been too minimal (around Rs 15,000 crore in the first year).
• A number of factors preventing PM-AASHA to be inclusive:
  • Agri-Marketing reforms are incomplete: Poorly functioning APMCs with cartelization, lack of transparency which causes price distortion.
    • The three farm laws which were expected to reform agri-marketing in India had to be withdrawn due to farmers’ protest.
  • Poor infrastructure: This has led to farmers remaining out of MSP regime, remaining out of MSP regime.
    • To increase procurement of pulses, oilseeds etc., a large infrastructure improvement is required at state level. This infrastructure is absent or very poor at state level.
  • Further, ineffective supply chain management, has rendered the whole scheme trivial.
    • For e.g. NAFED has a stock of 4 million tonnes of pulse and oilseeds, but their distribution policy is non-existent.
  • State Financial condition may not be strong enough for the program.

Other Criticism of MSP mechanism in general

• MSPs causes market distortion -> this negative impacts free market economy and investment in the sector.
• Cropping pattern is affected and farmers tend to grow high MSP crops rather than the most suitable crop for the region.
  • Excess fertilizer and water guzzling crops makes agriculture unsustainable.
• Higher inflation due to higher MSP pressure also has to be considered while announcing MSP for the food crops.
• Cost Plus Pricing is risky as it ignores the demand side, i.e. demand-supply, domestic and international price trends, terms of trade, inter-crop price parity etc.
• Leads to less focus on non-price factors like technology, inputs, services, institutions and infrastructure.
  • High fiscal burden on government
• Bigger stock exceeds the stock holding norms of FCI
• WTO’ AOA issues (discussed with WTO issues separately)

Way forward

• There is a need of correction in the way MSP is provided.
  • Land rentals and capital depreciation needs to be kept in mind.
• In order for our procurement policy to be really inclusive, government will need to focus upon improving the procurement infrastructure in rural, remote and backward areas. There is also a need to fast track the reform process of APMCs to end cartelization and promote transparency.
• Steps towards wooing private investments needs to be enhanced. Crop mandis can ensure more competition and thus better output for farmers.
• Further, FCI and NAFED will have to strengthen the supply chain mechanism to focus more on efficient distribution of the procured food items.
• At the same time we should remember that procurement schemes can only be a temporary solution. For lasting impact we need other structural changes. Farming has to be made profitable by reducing production cost and improving returns.

In summary, there has to be a Comprehensive ‘Production, process and market’ approach through higher investments on market infrastructure, processing, value addition and agri-business and diversification along with farmer’s welfare initiative.

Example Questions
i. What do you mean by Minimum Support Price (MSP)? How will MSP rescue farmers from the low income trap? [Mains 2018, 10 marks, 150 words]

GOVERNMENT’S SUBSIDY EXPENDITURE

• For FY23, government has spent Rs 5,32,446 crore on subsidy.
  • This includes Food Subsidy (Rs 2.8 lakh crores), Fertilizer Subsidy (Rs 2.1 lakh crores), and Petroleum subsidy (Rs 30,756 crore).
• It was the 2nd highest ever after the 7.06 lakh crores of FY 20-21.
• But, in 2020-21, the spike in subsidy was on account of the finance ministry making a one-time provision to clear all dues to the FCI and fertilizer companies.
  • The centre in previous years was not providing fully for subsidies, arising from these entities selling grain and fertilizers at below cost to PDS consumers and farmers respectively.
• Key Reasons for Rise in Subsidy Burden:
  • Covid-19 Pandemic: The lockdown led to launch of various initiatives like Pradhan Mantri Garib Kalyan Anna Yojana.
  • Russia-Ukraine War: This led to surge in global prices prices of petroleum and fertilizers.
    • Government had to keep farmers and consumer insulated from this price rice which led to rise in subsidy burden.