An MSP scheme to transform Indian agriculture

News: The article suggests a different way of designing a minimum support price (MSP) to transform Indian agriculture.

How the current price stabilization policy for food grains has evolved?

The Essential Commodities Act in 1955 was passed to counter price rise due to speculative private trading, and then MSP came in the 1960s.

Then, a buffer stock policy for market intervention was developed

– to set cost-based minimum procurement price, to pay the difference between procurement price and market price, store the procured surplus for sale through the Public Distribution System (PDS) and for market intervention to stabilize price.

What are the consequences of this price stabilization policy?

The current price stabilization policy has resulted into centralized procurement, storage and distribution mechanism which has increased procurement cost.

Also, the 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 increased, while that of coarse cereals reduced.

It also changed the dietary pattern.

How MSP should be redesigned?

One, price should be charged in a range according to harvest conditions. For instance, each crop within a band of maximum and a minimum price depending on harvest conditions will have its price set in the band.

The price of some selected coarse grains can be fixed at the upper end to encourage production in rain fed areas. This will fulfil objective of income support to farmers, price stabilisation and food security and induce more climate-friendly cropping patterns.

Two, there is need of wider MSP coverage with decentralized procurement mechanism. For instance, if we calculate economic cost, some 45%-50% of production is for farmers’ self-consumption and the rest is marketed surplus. From the total procurement cost of this surplus, the net revenue recovered through the PDS must be deducted.

It will be the same as DA to public sector employees, less than the total tax break given to a handful of industrial houses.

This expenditure will benefit more than half the population directly and another 20%-25% of the population indirectly in the unorganized sector. It will raise industrial demand for the unorganized sector.

Why India needs a decentralized mechanism of procurement?

The centralized mechanism of procurement at MSP requires bringing the procured grains to centralized Food Corporation warehouses. From here they are sent back to each district/province and from there to villages/slums/wards for distribution through fair price shops at an issue price fixed by the government. It is below the market price to make it affordable for poor households.

Hence, the total economic cost is rising which include subsidy for selling below market price, procurement costs, distribution costs of freight, handling, storage, interest and administrative charges along with costs of transit and storage losses.

What is the way forward?

First, agricultural debt can be linked with selling of grains under MSP to provision of bank credit particularly for small farmers.

The farmer can get a certificate for 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 protect them from bad harvest years by storing the certificates for later use.

Second, decentralize the implementing agencies for MSP under the constitutionally mandated supervision of panchayats.

Source: This post is based on the article “An MSP scheme to transform Indian agriculture” published in The Hindu on 11^th Feb 2022.