Explained: In perspective, farm distress and the demand for guaranteed MSP

News: Despite the announcement by the PM to repeal the three farm laws, farmers have said their protest will continue. They have written to the PM with their six remaining demands.

One of the main demands by farmers is that, MSP should be made a legal entitlement of all farmers for all agricultural produce. However, a legally mandated MSP regime is likely to be neither feasible nor sustainable in the long run. A guaranteed MSP can have a few unintended consequences.

Hence, a balanced approach would be to address the issues hampering the growth of agriculture and doubling the incomes of farmers in India.

What is the status of MSP in India?

MSPs are the prices at which, the government promises to procure agricultural produce from farmers.

At present, the government announces MSPs for 23 crops, but procurement happens only for a few among them. Also, procurement varies quite a lot across states.

Till now, the Government is not legally mandated by law to procure under MSP. The government can by its discretion choose, not to procure.

What are the issues/challenges in a legally mandated MSP regime?

A legal mandate for MSP would force the government to purchase all the produce that any farmer wants to sell at the declared MSP. It would also have to procure from all states, and all crops for which MSPs are announced. This will have the following unintended outcomes:

– High cost to the exchequer: According to one estimate, government would need an additional Rs 5 trillion to buy surplus crops. It will further incur holding and carrying costs, and might have to sell the stock at subsidised rates.

– Loss of food grains due to rotting in mandis.

– Increase food inflation.

– Encouragement to unsustainable cultivation of water intensive crops, rice and wheat. This will indirectly contribute to stubble burning.

– It will increase the capacity of buffer stocks. Already, grain stocks lying with the government are more than twice its buffer requirement.

What are the issues that are hampering the growth of agriculture in India?

– Holdings are fragmented and have become uneconomical.

– Lack of focus towards crop diversification

– Public investments compared to subsidies are very less.

– Declining productivity.

– Disguised labor force

– Low income (Farmers earns an average of ₹27 a day)

– Lack of growth in non-farm sector jobs, limiting diversification of agriculture.

What is the way forward?          

Instead of bypassing the market by using MSPs, the government should make efforts to enable farmers to participate in the market.

Ramp up investment in the agriculture sector: Provide better irrigation facilities, easier access to credit, timely access to power, and ramping up warehouse capacity and extension services, including post-harvest marketing. This will increase farmers’ bargaining ability and choices before them.

Boosting India’s industrial and services sectors: Agriculture accounts for just 17% of India’s GDP while employing 55% of its population. Industry and service sectors can potentially take up the excess labor that is presently engaged in unremunerative farm activities. Rapid growth of industries and services for the next couple of decades could help alleviate India’s farm distress.

Direct cash transfers to the rural poor: In the short term, providing direct cash transfers to the rural poor can alleviate distress. $100 billion in annual subsidies for food, farming and village unemployment should be slowly replaced by a basic income.

Replicating the success of AMUL in agriculture: Supporting producers’ organizations that capture more of the farm-to-fork value chain would mean better prices for farmers.

Source: This post is based on the article “Explained: In perspective, farm distress and the demand for guaranteed MSP” published in The Indian Express and “Modi’s farm misadventure is a huge setback for urbanization” published in Live mint on 23rd November 2021.