The pitfalls of legalizing agricultural support prices

While the peasant unrest that lasted more than a year was finally quashed, their demand for a law guaranteeing minimum support prices (MSP) for crops continues. Can PSM be legalized in a country that produces around 1,000 million tonnes of agricultural raw materials? If so, who will benefit from it? How much will such a plan cost? Are there any alternatives?

The Center has annually announced the MSP of crops for two seasons – kharif and rabi – since 1965, based on the recommendation of the Agricultural Costs and Prices Commission (CACP). Initially, it was only advertised for wheat and paddy. Over the years, other cultures have been added. The MSP is currently proposed for 23 crops. Historically, the MSP is determined based on the cost of cultivation, the prices of inputs, the supply and demand of crops, the price level in world markets, etc.

Although the CACP uses nine different cost concepts (A1, A2, A2 + FL, B1, B2, C1, C2, C2 * and C3) to estimate the cost of production, the MSP was set based on the formula cost A2 + FL until 2018 While cost C3 includes all expenses incurred for cultivation, A2 only covers the farmer’s direct expenditure for cultivation. That is, the cost A2 + FL (family labor) does not take into account the cost of depreciation of agricultural machinery, interest on loans, etc. Therefore, the spread between the cost C3 and A2 + FL is 30 to 50 percent for most mandates. harvests.

In such a scenario, crop production becomes unprofitable for farmers. They therefore require PSMs that cover all production costs. The Farmers Commission led by MS Swaminathan (2006) recommended that MSPs for crops be set at 50 percent more than the cost of production. In light of continued demand from farmers, the government made a historic announcement in the 2018-2019 budget that the PSM will be set at at least one and a half times the cost of production.

Since Kharif 2018, the MSP is fixed on the basis of the cost A2 + FL plus 50% of the formula. However, even after achieving this unprecedented increase in PSM, farmers claim that the income from cultivation is grossly insufficient. This is mainly due to poor procurement, which is essential to benefit from the MSP.

Defective purchase:

The supply has been poor over the years, except for paddy and wheat. Even for paddy and wheat, not all states have benefited from the supply. The total amount of paddy purchased during the 2020-21 kharif was 601 lakh tonnes (lt). Of this total, 174 were from Punjab and Haryana. That is, about 29% of the money spent on buying paddy went to these two states alone. Likewise, about 52% of the money spent on wheat purchases went to these two states. Can this distorted supply help farmers in other states?

The supply is not linked to the crop production of the different states. In 2018-2019, Punjab’s share in paddy production was only 11%, but its share in purchases was 25.53%. West Bengal’s share in purchases was only 4.46 percent, while it accounted for 13.94 percent of paddy production. Similarly, Tamil Nadu accounted for 5.26 percent of paddy production, but its share of purchases was only 2.91 percent.

Thus, rice farmers in most states may have sold their crops to private traders below the MSP. This is also reinforced by data from the Farmers Situation Assessment Survey (SAS) in 2018-2019 which highlighted that only around 17% of farm households sold paddy to supply agencies. If the supply of crops is linked to their production in each state, most PSM issues will automatically go away. So what is preventing the link between supply and production?

Alternative options

Although elite farmers believe legalizing PSM will benefit them, it can have serious ramifications. Some estimates suggest that it will cost around ₹ 17-lakh crore each year to purchase the 23 compulsory crops.

In addition, if the MSP is legalized, there will be a demand to include other crops, notably fruits and vegetables, the current production of which is around 320 million tonnes. Dairy farmers may also require an MSP for milk and other products. Therefore, the cost of purchasing under the MSP will be unimaginable and will increase dramatically every year. In addition, it will mainly benefit farmers with more than 2 hectares of land.

The question of legalization of the MSP arises mainly due to the exploitation by intermediaries and private traders. Often, farmers do not even receive 70 percent of the MSP for their produce from private traders. This is reinforced by ACCP data, which shows that market prices are below the PSM for most compulsory crops. Therefore, the government should pass a law with the condition that no crops can be purchased by private traders or agencies below the MSP. This will eliminate most of the problems associated with MSP.

Second, SAS data from 2018-19 suggests that knowledge of MSP-based procurement is low. This could be higher among smallholder farmers, who constitute 86 percent of all farmers. As a result, private traders and middlemen exploit farmers by setting lower prices. To stop this, the government can pass a law on “the right to sell to the MSP by marginal and small farmers”, with a carefully designed methodology.

The third option concerns procurement. According to SAS data from 2018-19, the number of farm households that sold their crops to the supply agency is only around 5% for most crops (see Figure 1). With this low supply, how can farmers benefit from PSM?

The Shantha Kumar Committee report (2015) not only questioned the undue emphasis on paddy and wheat supply, but suggested expanding the supply system.

If 20 to 25 percent of crop production is purchased, the flow of excess supply into the market can be reduced, which will increase market prices for the benefit of all farmers.

Even if the MSP is legalized, there is no guarantee that it will help increase farmers’ incomes as the methodology followed to estimate the cost of production is outdated and flawed.

While every effort is needed to set the MSP based on the actual cost of production, it is also necessary to reduce the cost of cultivation which has skyrocketed, especially after the introduction of MGNREGS.

The author is a former full-time member (official) of the Agricultural Costs and Prices Commission, New Delhi. Opinions expressed are personal