MSP Abracadabra: The Whats, The Whys and the Hows

Every year since the 1960s, the central government has been announcing a Minimum Support Price (MSP) to encourage farmers to produce more and save India from over-dependence on food imports. The method of MSP has evolved over the years in response to demands from farmers to make it adequately remunerative.

The farmers now want MSP to be determined and legally guaranteed as per a formula recommended by a commission that the earlier UPA government had set up under the late scientist MS Swaminathan – widely known as the father of India’s green revolution. The current government is not in favour of a legal guarantee for MSP.

Here is a ready reckoner on the festering crisis over MSP:

What Is MSP & Why Was It Brought In?

The Partition of India meant that India’s rice bowl in the deltaic region of East Bengal and wheat growing canal lands in West Punjab were lost to Pakistan. This led to food prices rising in India as the country tried to cope with an increasing population and lower food availability.

A military coup in Myanmar, which used to sell rice to India on rupee terms, in 1962 and subsequent snapping of ties with Delhi meant that rice imports became dearer and had to be brought from elsewhere against hard dollars, pushing up prices further in the country, and creating a foreign exchange shortage.

So much so that the then Prime Minister Lal Bahadur Shastri extolled Indians to skip one meal a week and even grow food on rooftops to eliminate costly imports.

India then took on a policy of bringing in the Green Revolution by adopting new technology, new seeds, chemical fertilisers, controlled irrigation practices, and promising farmers a MSP or a floor price for the rice and wheat they undertook to grow.

The MSP was the minimum bench-mark guaranteed rate at which federal agencies like the Food Corporation of India would buy these two crops so that farmers were protected. Private traders and millers were forced to set prices to match the MSP to be able to entice farmers to sell it to them too.

The region selected for this experiment was the Doab—the fertile lands between the Yamuna and the Ganga in Punjab, Haryana and western Uttar Pradesh.

The Green Revolution was a resounding success and India not only became self-sufficient in food production, it became a major food exporter. Much of the success was attributed to the MSP model adopted by India and its Green Revolution was widely copied by other developing nations.

How Is MSP Set?

The MSP is decided by the Commission for Agricultural Costs and Prices (CACP) based on production costs, market trends and demand-supply factors. Costs taken into account include inputs like chemicals, fertilisers, hybrid seeds, and labour, as well as hidden costs like family hands who work on fields and implicit rent of the land.

Agricultural economists use terms such as A2, FL and C2 to calculate the cost economics. While A2 refers to expenditure on inputs, FL refers to implicit costs. C2 includes A2, FL and fixed asset costs.

The Swaminathan Commission Report

By the 1990s, farmer distress and suicides reared their ugly head as productivity gains due to adoption of new farming technology plateaud and farm sizes began to grow smaller as population kept increasing all over the country.

This forced the Government to rethink its farm policies and it appointed a committee, the National Commission of Farmers, led by globally renowned agricultural expert MS Swaminathan to look into the whole gamut of issues in agriculture.

Among other things, the Swaminathan Commission suggested the MSP should be at least 50 per cent more than the weighted average cost of production. It meant that farmers should be paid C2 plus 50 per cent as MSP for the corps they grew.

The Swaminathan Commission recommended a host of other measures to increase productivity, improve soil quality, to stop fragmentation of farms and help farmers sell to the global market, but politically the MSP recommendations were the most catchy, easy to understand and easy to use to rouse farmers.

What Are The Farmers' Demands ?

Since then, farmers have been demanding a law to make the C2 plus 50 per cent formula a legally enforceable act. Other demands have also been thrown in, including debt relief, pension for agriculturists, withdrawal of cases filed against farmers during the first agitation in 2020-21 etc..

The problem is that faced with huge stocks of food, the government has been trying to limit its purchase to fresh grain, which means farmers have to depend on market forces to decide prices and these are more often than not, lower than the MSP rate. Hence, this demand has become the cornerstone of the entire farmers' movement in northern India.

Many fear the cost of legally guaranteeing the purchase of India’s agricultural production would possibly be too high for the federal budget to take care of and hence there is a marked reluctance on the part of the state to agree to it till now.

How Does It All Stack Up?

Union Agriculture Minister Arjun Munda has reportedly stated that a law guaranteeing MSP for crops should not be rushed into, without comprehensive consultations with all stakeholders, and has urged protesting farmers to join structured discussions on the critical issue.

Analysts believe the working capital outlay may be as high as Rs 6 lakh crore for the government to guarantee purchase of all 23 crops for which MSP is announced.

For the government to meet the difference between market prices and the current announced MSP, the sum which may have to be spent as of date may be as high as Rs 25,000 crore without even bringing in the Swaminathan formula.

Government agencies have already bought about 60 million tonnes of rice and around 40 million tonnes of wheat over the past three marketing seasons. This has obviously been far in excess of the annual requirement of 55 to 60 million tonnes for both grains which need to be purchased under the National Food Security Act for subsidised distribution to poor households.

Higher purchases would mean a fresh mountain of food stock which would create a new dilemma for the federal government as far as storage, use and disposal is concerned, adding to its already bloated food subsidy bill which is already worth over Rs 2 lakh crore.

The Way Forward

At the same time, a model which encourages only production of one or two crops such as paddy and wheat (as most MSP money is used to buy these crops), using technologies which emphasise on overuse of water, chemicals and pesticides is also unsustainable. Especially, as it refuses to address serious nutritional and food market deficiencies while emphasising production of grain crops.

India needs more lentils and oilseeds to be produced as there are gaps between demand and supply. It also requires the production of more vegetable proteins to address the nutritional deficiencies of large swathes of its population.

The way forward could be a new formula to incentivise farmers to produce foodgrain and other crops, diversify their farm output and adopt greener farming techniques moving away from chemicals and water intensive cultivation.

Many feel farmers could be paid direct cash benefits for tailoring their farm outputs according to the needs of the time.