Busting the Misconceived Criticisms of an MSP Law
The system of Minimum Support Prices (MSP) came into being in the 1960s and was supposed to provide an assurance of minimum remunerative prices to farmers with the promise that the government will purchase any quantity of farm produce that farmers are unable to sell at the minimum prices. However, this promise was never kept, and the system of government procurement was created only for a few crops and functioned only in a few states. This has become a major problem in the recent years as, in any given year, market prices for several crops prevail at levels that is far below the MSP.
The demand for a guarantee of remunerative prices has emerged in this context.
Prior to the 2014 Lok Sabha elections, Narendra Modi promised that if voted to power, his government will change the way MSP is set. “There will be a new formula – the entire cost of production and 50% profit,” he had said. What he was promising to implement was one of the key recommendations of the 2006 M.S. Swaminathan Commission. Ten years’ into his time in office, though, this promise remains unfulfilled.
In response to the ongoing farmers’ struggle to press for the demand, a number of mainstream/neoliberal commentators as well as editorials in the media have questioned the feasibility and wisdom of farmers’ demand for a statutory right to MSP. These criticisms emanate from a neoliberal dogma about cutting welfare spending and turning the state into a facilitator for capitalists. It is precisely this perspective that lies at the root of the agrarian crisis. The purpose of this note is to dispel various myths being spread by these critics.
Why do farmers need a guarantee of MSP?
Assured, remunerative prices are important not just for welfare of farmers but also for India’s food security. For a large country like India, domestic production has to be the mainstay of food supply. As has been clear since the 1960s, dependence on imports for food grain not only makes India vulnerable to vagaries of international markets, it can force the country to compromise on its strategic interests.
Farmers, like all other self-employed persons and businesses, do what is most profitable. But unlike other businesses, farmers face a particularly vexed problem. When they decide to sow a crop, they do not know how much the produce will sell for. Given the seasonality, and the fact that farmers sink a lot of resources in raising the crop, there is nothing they can do when the prices fall. Having incurred large expenses, and often in debt, few farmers can hold the produce and wait for prices to rise. This is a major cause of farm losses, debt burden and distress among farmers.
Why can’t markets be allowed to determine equilibrium prices?
There are many reasons why agricultural markets do not settle at equilibrium prices. Agricultural markets are notoriously imperfect. The number of producers/settlers is vast. On the other hand, often, a few large buyers/traders control the markets. This results in monopsonistic markets in which buyers exert undue influence over market prices and profiteer from it. This situation is made worse because farmers are often dependent on traders for finance and indebted to them. Also, individual farmers cannot predict either the conditions of demand at the time of harvest or the overall supply. Unpredictable weather conditions result in crop losses and supply shortages. On the other hand, there are years when a glut is caused because many farmers decide to grow a crop that was profitable in the previous year. Large businesses also have significant stocking capacity that they can use to sway market prices. For many crops, changes in supply conditions in other parts of the world have an impact on domestic prices in India.
Given these imperfections, agricultural prices fluctuate wildly. A crop that fetches a good price in one year sells for rock-bottom prices in the next. Farmers cannot predict prices when the decide to sow a crop, and often end up making huge losses. Once a crop is sown, farmers have little choice left.
Given these problems, agricultural prices should not be left to unregulated market
Government cannot buy and distribute all the produce
It is correct that government cannot procure and distribute all the agricultural produce and sell it. It is also correct that, in the current situation, if private buyers are forced to buy at a high MSP, this would be highly inflationary as they would pass the increased cost to consumers.
To understand how this can be avoided, we need to understand why this situation has arisen.
Neoliberal policies adopted since the 1990s have resulted in a sharp rise in cost of cultivation, which, in turn, has broken down this synchronisation between public provisioning of agricultural inputs and services, agricultural price policies and food policies.
The neoliberal fixation with fiscal austerity and trade liberalisation has resulted in the reduction of state support to agriculture in the form of privatisation of supply of agricultural inputs, deregulation of input prices, power sector reforms, low public investments and low supply of formal-sector credit to agriculture. This has pushed up the cost of cultivation and made open market prices unremunerative. As a result, public procurement at MSP, which was meant to be a marginal operation, necessary only when market prices moved adversely, has become critical for farmers to not make losses in agriculture.
But this should not be required. The misalignment between open market prices and MSP, because of privatisation and deregulation of input prices, needs to be fixed by regulating the input costs. As per the Swaminathan Commission recommendations, MSP should be fixed at 1.5 times the cost (commonly known now as ‘C2+50%’). If cost of cultivation can be brought down, the MSP can be aligned closely with normal open market prices. This will ensure that, in any year, for most crops, market prices are remunerative.
In such a situation, restrictions can be imposed on private buyers to not buy at prices less than the MSP, without this causing any significant disruption or inflation, and government will only need to procure those crops for which private traders are not willing to pay even the MSP.
A guaranteed MSP will encourage cultivation of most profitable crops rather than those that are best suited to a region. This is ecologically disastrous, particularly for groundwater and soil, and bad for public health and food security.
Farmers, like all other businesses, do what is most profitable. Why should they grow crops that are unprofitable? What is to guarantee that under free-market conditions, crops that are ecologically appropriate will be the most profitable?
In fact, in a regime in which MSP applies to all crops, the government can ensure that crops that are ecologically most appropriate are also most profitable. The MSP can be set at a high level for crops that are ecologically appropriate and are important from the perspective of nutrition. Free markets do not give a premium to these aspects. As a result, crops that are ecologically appropriate and nutritious are not profitable. The case of pulses and millets is well known.
Sometimes, it is falsely argued that the MSP regime has incentivised farmers in Punjab to grow water intensive crops like paddy. The ecological problems of Punjab are not because paddy is covered under MSP and procurement. It is because other ecologically more appropriate crops are not covered under the MSP and procurement regime. There is nothing to ensure that millets and pulses are equally profitable, and the prices of these crops are not guaranteed through a system of procurement.
The only way farmers can be expected to adopt ecologically sustainable crops and farming practices is by making sure that these are also profitable. The MSP is a critical piece in that strategy.
A guaranteed MSP would be inflationary. A guaranteed MSP would make our farm products globally uncompetitive.
The inflationary impact has its roots in rising input costs. Prices of farm inputs have shot through the roof as a result of privatisation and deregulation. This needs to be checked. Input subsidies have to be for controlling prices of inputs and not for lining the pockets of seed and fertiliser companies. Government agencies should provide affordable inputs to farmers.
If increases in the cost of cultivation can be contained, MSP will cease to be inflationary or become a barrier for agricultural exports.
Also, India’s agriculture is not, and should not be, primarily export-oriented. Growing water-intensive crops for exports is a bad idea. Shifting to export-oriented agriculture and compromising our own food security is a bad idea. Farmers should grow crops that are important for India’s food security and are ecologically appropriate. For this to happen, cultivation of these crops has to be made more remunerative. This requires a guarantee of MSP.
The government should direct resources towards safeguarding farmers against fluctuations, intervening when required.
This is precisely what farmers are asking for. Having a system of MSP and procurement intervention is the way to ensure that markets give remunerative prices, and when they do not, the government steps in. That is the guarantee farmers are asking for.
Government has been saying that they have already implemented the recommendation of the Swaminathan Commission regarding MSP.
The Swaminathan Commission recommended that the MSP should be at least 50 per cent above the cost of cultivation. In the methods developed and used by the Commission for Agricultural Costs and Prices, the total cost of cultivation is called C2. But instead of fixing MSP at C2+50% level, the Modi government has started using a lower cost called “A2+FL” as the benchmark for deciding MSP. A2+FL does not cover the entire cost of cultivation. It is much lower than the total cost actually incurred by farmers.
Also, without a mechanism for enforcing the Minimum Support Price as a floor price, the MSP is nothing more than an empty promise. For most crops, MSP is just an announcement. There is no mechanism to ensure that farmers get that price for their produce.
Rather than a guaranteed MSP for every crop, the government should offer support for the adoption of modern technologies for efficient and sustainable production.
Nothing stops the government from giving a higher MSP for ecologically suitable crops, and providing support for improving efficiency and adoption of new technologies. Where is the contradiction with providing a guarantee of MSP?
Instead of a guaranteed MSP, the government should step up public investment in agriculture.
Of course the government needs to step up public investment. Why should a guarantee of MSP prevent the government from stepping up investment? Farmers are not asking for replacement of investment in agriculture with funds for procurement. They are asking for support for farmers through reduction in largesse and concessions given to corporates, not doing loan write-offs to corporates, and taxing the super-rich.
A small proportion of farmers in a few states corner all the benefits of MSP.
The MSP covers 23 crops which account for a small share of total value of agricultural output of India, and public procurement benefits a still smaller fraction of farmers.
These are, however, the most important crops from the perspective of food security. The government does not announce MSP for a number of high value commercial crops, livestock products, fish, etc.
The system of procurement currently benefits only producers of rice and wheat, and that too only in a few states.
There is a need to expand the guarantee of assured and remunerative prices through the system of MSP and public procurement. Some people may argue that, as a first step, the system of public procurement should be expanded to the 23 crops for which MSP is declared and, for these crops, to all the states. There is, however, no doubt that eventually all farmers should be provided a guarantee of remunerative prices for their produce.
A lot of growth in Indian agriculture in recent decades has come from sectors such as dairy and poultry, which are not covered by the MSP. This shows that MSP is not necessary for growth.
It is possible that, for some commodities, markets provide remunerative prices in some years, and therefore, production of these commodities sees a growth. But this does not happen for all crops, or at all times.
It may also be noted that the estimates of production for dairy and poultry are not as reliable as they are for the 23 “forecast crops” for which MSP is declared. While estimates of production for “forecast crops” are based on crop cutting surveys done every season in most states, the surveys for collection of data on production of these crops are not done systematically in most states.
Growth estimates for some of these commodities are likely to be overstated. For example, official statistics showed high growth for perishable commodities like milk even during the COVID period when producers of these commodities faced a severe crisis.
A guarantee of MSP will not benefit the bulk of farmers who have small holdings, often working as farm and non-farm labour.
Guaranteed MSP is not a solution to all problems. But a more remunerative price does create conditions where farmers can pay better wages to farm workers. Remunerative agriculture is critical for the rural economy, including farm workers, and not beneficial only to large farmers. On the other hand, distress among farmers puts downward pressure on wages, depresses rural demand and slows down economic growth.
Vikas Rawal is a professor of economics at the Centre for Economic Studies and Planning, Jawaharlal Nehru University and member of the Central Kisan Co. Originally published by The Wire.
