Don’t support minimum support prices

News: Legal MSP is an illogical, expensive and inefficient policy instrument.

Unless farmers move rapidly towards high-value agriculture, there is not much scope to achieve better incomes for smallholders in an economically efficient and sustainable way.

What is the actual reach of MSP regime?

If one uses the Census and National Accounts data,

– The percentage of farmers benefiting from MSP comes around to be 5.6%

– The value of agri-produce benefiting from the MSP regime comes down to just 2.2%.

The reach of MSP, both in terms of agri-Households or the value of agri-produce, is not more than 9%.

Why legalising MSP is economically illogical?

MSP distorts the basic logic of the supply-demand mechanism, slows down the process of diversification, and is economically a very expensive and inefficient policy instrument.

For instance: Procurement at MSP has spread to many other states, most notably in Chhattisgarh and Telangana for paddy, and Madhya Pradesh for wheat. This is taken as a success story. However, the point which is missed here is that most of these farmers also benefit from highly subsidised PDS. This is irrational and economically inefficient. Paddy is first bought from small and marginal subsistence farmers at MSP, and then same is given back to them after incurring 40% higher costs on top of MSP during the process of procurement, stocking and distribution.

What is the way forward?

Providing direct income support: It is much better to directly support small and marginal farmers with an income policy or through a diversification package towards high-value agriculture. This support can be on a per hectare basis, tilted towards small and marginal holders, which can be directly transferred to farmers’ accounts without distorting markets or cropping patterns. For instance, the PM-KISAN policy of giving Rs 6,000 into the accounts of agri-HHs can be refined and scaled up, by linking it with adopting farming practices that are environmentally sustainable.

The government’s focus needs to be directed towards

– the development of efficient value chains

– forming of commodity-specific Farmer Producer Organisations (FPOs)

–  equipping them to assay, grade, and package their products

–  incentivise the private sector to invest in logistics, storage, cold chain, processing.

Source: This post is based on the article “Don’t support minimum support prices” published in The Indian Express on 3^rd Jan 2022.