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What the editorial is about?
A different way of designing a Minimum Support Price (MSP).
The recent farmers’ movement.
Minimum Support Price (MSP)
- The minimum price set by the government for certain agricultural products, at which the products would directly be bought from the farmers if the open market prices are less than the cost incurred.
- MSP must look especially into the requirements of farmers and the landless.
- MSP could serve, in principle, three purposes.
- Price stabilization in the food grains market.
- Income support to farmers
- As a mechanism for coping with the indebtedness of farmers.
The price stabilization policy
- The price stabilization policy for food grains in India evolved over time, first with the Essential Commodities Act in 1955 to counter price rise due to speculative private trading and then MSP in the 1960s.
- A buffer stock policy with the public storage of food grains for market intervention was developed over time to involve different kinds of mechanisms such as:
- Setting cost-based minimum procurement price.
- Paying the difference between procurement price and market price.
- Storing the procured surplus for sale through the Public Distribution System (PDS) at issue price.
- Market intervention to stabilize price when deemed necessary.
- These induced farmers to shift to a high-yielding varieties cropping pattern during the Green Revolution while ensuring food security for citizens.
- This task required interlinking procurement, storage and distribution with more centralized investment and control of each of these tasks.
- The procurement and PDS from the Green Revolution period provided assured price incentives for rice, wheat and sugar (the flagships of the Green Revolution), but left out some 20 crops now under discussion for MSP including millets, coarse cereals, pulses and oilseeds.
- As a result, this partial MSP coverage skewed the cropping pattern against several coarse grains and millets, particularly in rain-fed areas.
- The area under cultivation of rice and wheat from the time of the Green Revolution till recently increased from 30 million hectares to 44 million hectares and nine million hectares to 31 million hectares, respectively, while that of coarse cereals plunged from 37 million hectares to 25 million hectares.
- Although part of the diet of many people across the country, these left-out crops (grown mostly in rain-fed conditions) were not made available in ration shops.
- Almost 68% of Indian agriculture is rain-fed and the crops grown in these regions are usually more drought-resistant, nutritious and staple in the diet of the poorer subsistence farmers.
- This has been a particularly vulnerable point of our food security system; greater coverage of all 23 crops under MSP is a way of improving both food security and income support to the poorest farmers in rain-fed regions.
- The total economic cost involves subsidy for selling below market price along with procurement costs, distribution costs of freight, handling, storage, interest and administrative charges along with costs borne due to transit and storage losses.
- If price is charged in a range according to harvest conditions, the total economic cost will vary within a price “band”.
Way Forward: A different way of designing a Minimum Support Price (MSP)
As a band
- MSP has to be conceived as a list of some 23 crops with a more flexible arrangement. Each crop within a band of maximum and a minimum price depending on harvest conditions (i.e., higher price in a bad and lower price in a good harvest year in general) will have its price set in the band.
- The price of some selected coarse grains can be fixed at the upper end of its band to encourage their production in rainfed areas. In this way, the objectives of income support to farmers, price stabilization and food security and inducing more climate-friendly cropping patterns can be combined to an extent.
- Wide coverage of MSP through income support to farmers would generate massive positive economic externalities through raising industrial demand, especially for the unorganized sector.
- This will help in extending solidarity among farmers and non-farmers while creating a chain reaction of demand expansion through multipliers for the whole economy.
Credit points proportional to the amount sold
- A real breakthrough in the recurring problem of agricultural debt can be made by linking the selling of grains under MSP to the provision of bank credit, particularly for small farmers.
- The farmer can get a certificate selling grains at MSP which would be credit points proportional to the amount sold; this will entitle them to a bank loan as their right, and calibrate the fluctuations between good and bad harvest years by storing the certificates for later use.
- This mechanism would go a long way not only in addressing the indebtedness in the farming community but also has the virtue of great administrative simplicity in disbursing bank loans.
Decentralizing the implementing agencies
- It needs emphasizing that how effectively such an MSP scheme could be implemented would depend largely on decentralizing the implementing agencies under the constitutionally mandated supervision of panchayats.
An MSP scheme with a decentralized plan would aid price stabilization, offer income support, and also cope with the indebtedness of farmers.