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Understanding MSP: Is there a way out?

ICICIdirect 10 Mins 06 Mar 2024

Much has been said and written about Minimum Selling Price (MSP). If you are not aware of the issue, the next 5 minutes of your time investment could change that. What is that farmers are demanding? Is it a fair ask? If you want to know the answer to these questions, you are reading the right article.

What is MSP?

Let us understand MSP. We keep the discussion general - explain the concept. The Minimum Selling Price, or MSP, is a tool used by governments to ensure that farmers receive a fair and guaranteed price for their agricultural produce. MSP is essentially a floor price set by the government to protect farmers from market fluctuations and ensure their livelihoods. 

The MSP varies depending on the region, crop, and government policies. Governments typically take into account various factors such as production costs, market demand, and international prices when determining the MSP for different crops.

The Need for MSP

Just to set the context straight, the concept of MSP is already there in India. So, what are the farmers demanding? We get to it in a while. First, you need to understand the need for MSP. Why do farmers want to sell their crops to the government?

Assume in a calendar year, farmers have excellent crop growth. The equation is simple - when the production is more and the demand is less or the same, the prices come down. We have seen this multiple times - prices of onions and tomatoes increase when the supply goes down. Similarly, when the supply increases, the prices go down. 

In some cases (or for some crops), the prices go down so much that farmers are not even able to cover the production cost. Unfair, right? So, the government comes into the picture and offers MSP. It provides farmers with a guaranteed minimum price for their crops. It helps in ensuring a stable income for farmers, protecting them from price fluctuations in the market. It acts as a safety net, especially for small and marginal farmers who might be vulnerable to market risks.

Apart from the above reasons, MSP is needed for two more main reasons:

  • Incentive for Production: MSP acts as an incentive for farmers to produce crops that are essential for food security and agricultural sustainability. By offering a guaranteed price, farmers are encouraged to invest in the cultivation of crops even in unfavorable market conditions. It helps in maintaining adequate production levels of essential food crops.
  • Risk Management: Agriculture is inherently risky due to factors like weather uncertainties, pests, and diseases. MSP provides a form of risk management for farmers by assuring them of a minimum income, irrespective of market conditions. It allows farmers to plan their production and investment decisions more effectively.

What are farmers demanding?

As per the data available, 22 mandated crops are covered under MSP. 

However, if prices go below the minimum selling price, at present, there is no fool-proof mechanism that helps farmers get what the government has on offer - fixed rates. Also, the fixed rates are mostly for three crops - wheat, paddy, and sugarcane. The reason is that the government uses paddy and wheat for public distribution. On the other hand, sugarcane has to be taken by sugar mills within the geographical area allocated to them at a fair and remunerative price fixed by the government.

Now, the farmers want a legal guarantee (law) for MSP for all the crops. Is that even possible?

Is MSP for all crops possible?

To be honest, there is no YES or NO answer to the question. It's a grey area, and there are arguments from both sides. First, we need to understand the importance of farmers in the Indian economy. 

Agriculture is the largest employer in India, providing livelihoods to a significant portion of the population, particularly in rural areas. It employs more than 50% of the country's workforce, directly or indirectly, in activities such as farming, livestock rearing, and allied sectors like agribusiness and food processing. Despite its declining share in the overall GDP due to the growth of other sectors, agriculture still contributes a substantial portion to India's economy. It accounts for around 15-17% of the GDP, providing the backbone for economic growth and rural development.

So, if farmers are asking for something, the government should seriously consider it? As we know from the above numbers, the economy won't flourish without their support. To be honest, the government favoring MSP only for wheat and paddy is a problem. It could happen that more and more farmers will shift to wheat and paddy cultivation as they have security with the production of these crops. That would be a disaster for the country - you may already know the paddy and water problem. Second, if a large percentage of farmers shift to these, the production of crops that are not lucrative could take a back seat. Okay, so you may say, let the government legalize MSP.

Hold on, let us present to you the second side of the story. The problem with MSP as a law is that let us say that the MSP of wheat is kept at Rs 20000 per quintal. It means that no one can buy it below this price else it will become a punishable offense. Doing so will also disturb the demand and supply equation of these crops.

Secondly, as per some estimates, the government will have to spend between Rs 6 lakh and Rs 9 lakh crore to oblige with the law - purchasing crops at MSP. It will have a huge impact on the financials or balance sheet. In the last three years, the government has spent Rs 23 lakh crore on infrastructure, with roads, highways, and railways receiving significant investment. Now, the question is - if MSP comes, can the government still continue to spend Rs 23 lakh crore on infrastructure? Some cost-cutting has to happen from the budget of all sectors.

Before you go

You would have guessed by now that there is no easy answer or solution to this problem. Governments in the past have tried a workaround, but they have not been successful. The problem will be solved on a middle ground - direct income support to the farmers or some other way. Let us see how it turns out for the farmers and the economy.

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