- Farmers of some states have been protesting in Delhi against the new farm laws recently enacted.
- The primacy concern seems to be regarding the Minimum Support Prices (MSP) system, with farmers in Punjab especially fearing that the MSP system will soon be ended.
- This provides the context to understand the MSP system in India.
About: Minimum Support Prices (MSP)
- The Minimum Support Price (MSP) is the minimum price at which government procures certain agricultural produce like rice and wheat from the farmers.
- It is a form of market intervention by the Government of India to safeguard farmers against any sharp fall in farm prices, especially during bumper production years.
Objectives of MSP:
- The major objectives are:
- to protect the farmers from distress sales (at low prices)
- to procure food grains for public distribution
- The MSP announcement also gives a price signal to farmers ahead of the sowing season so that they can make the right choice of crop.
Crops Covered Under MSPs:
- Every year, MSPs are announced for 23 crops. These include 14 grown during the kharif/post-monsoon season, and 6 crops grown in rabi/winter season.
- Kharif Season Crops include: paddy, jowar, bajra, ragi, maize, tur, moong, urad, groundnut, sunflower, soyabean, sesasum, nigerseed and cotton.
- Rabi Season Crops include: wheat, barley, chana, masur, mustard and safflower.
- Other crops include sugarcane (covered through Fair and Remunerative Prices), jute and copra.
Process of MSP announcement:
- MSPs are recommended by the Commission for Agricultural Costs and Prices (CACP).
- These recommendations are made separately for the Kharif marketing season (KMS) and the Rabi marketing season (RMS).
- The recommendations made by CACP are then approved by the Cabinet Committee on Economic Affairs (CCEA).
Timing of Announcement:
- The minimum support prices are announced by the Government of India at the beginning of the sowing season for both rabi and kharif crops.
- The Food Corporation of India (FCI) is the nodal agency for procurement.
- FCI, along with State agencies, establishes purchase centres for procuring food grains.
- The State government decides on the location of these centres with the aiming of maximizing purchases.
Role of APMCs:
- Agricultural Produce Marketing Committees (APMCs) are physical markets regulated by respective state governments under the APMC Act.
- Typically, it’s only stocks brought to APMCs and other designated purchase centres that are procured at MSP.
Determination of MSPs:
- During the Union Budget for 2018-19, the Union Finance Minister had announced that MSP would be kept at a level of at least 1.5 times of the All-India weighted average Cost of Production (CoP).
- Earlier, the CACP considered various factors while recommending the MSP for a commodity, including cost of cultivation, supply and demand situation, market price, inflation, environment etc.
- This was based on the National Commission on Farmers (Chaired by Prof. M. S. Swaminathan) recommendation in 2006 that MSPs must be at least 1.5 times the “cost of production“.
- Calculating the Costs of Production:
- The CACP calculates cost of production at three levels- A2, A2+ FL and C2.
- ‘A2’ covers all paid-out costs of inputs directly incurred by the farmer, in cash and kind on seeds, fertilizers, pesticides, hired labour, leased-in land, fuel, irrigation, etc.
- ‘A2+FL’ includes A2 plus an imputed value of unpaid family labour (FL).
- ‘C2’ is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets, over and above the other main costs (A2+FL).
- The government says CACP considers both A2+FL and C2 costs while recommending MSP.
- Data used by the CACP:
- For calculating costs of production, the CACP does not do any field-based cost estimates itself.
- It merely makes projections using state-wise, crop-specific production cost estimates provided by the Directorate of Economics & Statistics in the Agriculture Ministry (which are generally available with a three-year lag).
- The CACP further projects three kinds of production cost for every crop, both at state and all-India average levels.
MSP implementation in not uniform across crops and states:
- While MSPs are announced for 23 commodities, in practice, MSP and procurement are effective for only few commodities, mainly paddy, wheat, and to some extent, pulses.
- For instance, only about 12% of paddy growers benefit from procurement at MSP.
- Due to limitations on the procurement side (both crop-wise and state-wise), all farmers do not receive benefits of increase in MSPs. The procurement is also mainly done in a few states.
- In Punjab, more than 95% of paddy growers benefit from MSP, whereas in UP only 3.6% of farmers benefit.
- Three states which produce 49% of the national wheat output account for 93% of procurement.
- For paddy, six states with 40% production share have 77% share of the procurement.
- Farmers who are unable to sell their produce at MSPs have to sell it at market prices, which may be much lower than the MSPs.
Change in MSPs Over Time
- Higher procurement of paddy and wheat, as compared to other crops at MSPs tilts the production cycle towards these crops.
- In order to balance this and encourage the production of pulses, there is a larger proportional increase in the MSPs of pulses over the years.
- In addition to this, it is also used as a measure to encourage farmers to shift from water-intensive crops such as paddy and wheat to pulses, which relatively require less water for irrigation.