MSP Guarantee Law and Farmer’s Protest- Pros and Cons- Explained Pointwise

MSP guarantee Law to provide a legal guarantee for MSP for all crops is the headline demand out of the 12-point demands of the recent farmers’ protest. The farmer’s cite inaction of the Central Govt on MSP guarantee law, which was negotiated by the Govt during the farmer’s protest of 2020-21, as one of the prime reasons for their recent protests. The farmers have also been demanding the determination of MSP in accordance with the Dr M S Swaminathan Commission’s report.

What is MSP? What are the Different Methods of Calculation?

MSP- The Minimum Support Price (MSP) for a commodity refers to the price at which the government is obligated to purchase the produce from farmers in the event that the market price falls below this threshold.

Process of awarding MSP-
a. MSP is based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). The CACP submits its recommendations to the government in the form of Price Policy Reports every year. It considers various factors such as cost of production, demand and supply, market price trends, inter-crop price parity.
b. The Cabinet Committee on Economic Affairs (CCEA) chaired by the Prime Minister of India takes the final decision (approve) on the level of MSPs, after considering the Price Policy Report, views of the state governments and overall demand-supply situation in the country.
c. Food Corporation of India (FCI) is the nodal agency for procurement, along with State agencies, at the beginning of the sowing season.

MSP for Different Crops- Government fixes MSP for 22 mandated agricultural crops and Fair and Remunerative Price (FRP) for sugarcane.

Different Production Costs Considered While Fixing MSP Regime

CACP reckons only to A2+FL cost for return. Currently, the MSP is fixed at 50% over the A2+FL cost.

NOTE-
1. C2 costs are used by CACP primarily as benchmark reference costs (opportunity costs) to see if the MSPs recommended by them at least cover these costs in some of the major producing States.

What is the argument in favour of MSP Guarantee Law?

1. Financial security- Legally guaranteed MSP would ensure farmers fixed remunerations to the farmers by financially securing them against the vagaries of price instability in the market.

2. Risk Cover- Legal guarantee to MSP would provide security to farmers from the risk of crop failure due to climate change, pests attacks and crop diseases.

3. Promotion of crop diversification- MSP law would promote crop diversification as farmers would be incentivised to grow less water-intensive crops like pulses and millets rather than water guzzling crops like rice, wheat and sugarcane.

4. Baseline or benchmark price- MSP sends a price-signal to the market that if merchants don’t offer higher than MSP prices, the farmer may not sell them his produce. Thus, it ensures that the market prices will not be drastically lower than MSP.

5. Solution to rural economic Distress- Minimum Support Price (MSP) can help in injecting financial resources into the rural sector. This will help in solving the problem of rural economic distress, which has been exacerbated due to demonetisation and COVID-19. For ex- Increase in MSP would increase the disposable income of farmers and agricultural labourers which in turn would boost the economy.

6. Right to Farmers- According to Shanta Kumar Report, only 6% of the farm households are able to sell wheat and rice to the government at the MSP rates. MSP Law would give legal rights to farmers to sell their produce to Govt agencies like FCI at MSP, in case they fail to get commensurate prices from the market.

What are the arguments MSP Guarantee Law?

1. Huge Fiscal burden on Govt exchequer- Legal guarantee to MSP would put huge fiscal burden on the Govt exchequer. This would increase the fiscal deficit of the Government and will have deleterious effects on the economy. For ex- According to an estimate, Rs. 5 trillion would be required for implementation of MSP Law.

2. Risk of undervaluation of crops with low yields- It would change the production pattern of crops in the country as farmers would try to grow crops with higher yields even if they are not suitable to their region. For ex- Farmers growing Cotton (Kharif crop) instead of millets in the drought prone region of Marathawada.

3. Increase in Food Inflation- Higher procurement cost due to MSP will result in increased prices of foodgrains, which would eventually affect the lower middle class and the poor.

4. Market Distortionary and economically unsustainable practice- Legal guarantee to MSP will push away private traders whenever production is more than demand. This, in turn, will lead to government becoming the de-facto primary buyer of most MSP- farm produce, which will be economically unsustainable. For ex- Withdrawal of the Maharashtra government 2018 order, which made it illegal for a private trader to purchase any agricultural produce below the government-fixed MSP.

5. Adverse Impact on India’s farm exports- If the MSP is higher than the prevailing rates in the international market, it will adversely affect India’s farm exports, which has seen remarkable growth in recent years.

6. Violation of WTO subsidies principle- MSP law would lead to violation of the WTO subsidies principles and India would face opposition in the WTO dispute settlement bodies by the developed nations. For ex- US win against China at WTO in 2019 in case related to China’s MSP support to its agricultural sector.

7. Induce MSP demands from other agri-allied sectors- Farmers engaged in agri-allied sectors like dairy, horticulture, pisciculture will start demanding MSP, if the Centre makes a law to guarantee 100% MSP procurement for the crops.

8. Storage and disposal Problems- MSP guarantee will create storage and disposal problems for crops such as Niger seed, Sesamum or safflower which will have few takers through PDS system.

What has been the government of India’s approach to ensure support to farmers?

The government has taken the ‘income support’ approach (like Centre’s PM-Kisan Samman Nidhi or the Telangana government’s Rythu Bandhu) approach instead of the ‘price support’ approach (in the form of legal guarantee to MSP).

Government has also been providing support to farmers through other schemes which are not violative of the WTO principles.
a. Supplementary income transfers under PM-KISAN
b. Crop insurance under Pradhan Mantri Fasal Bima Yojna (PMFBY)
c. Better access to irrigation under Pradhan Mantri Krishi Sinchai Yojana (PMKSY)
d. Creation of agriculture infrastructure through Agri Infrastructure Fund (AIF) with a size of Rs. 100,000 crore
e. Production loan to dairy & fishery farmers besides agricultural crops through Kisan Credit Cards (KCC).

What should be the way forward?

1. Price Deficiency Payment Schemes- Both NITI Aayog and Economic Survey have recommended Price Deficiency Payment schemes, in which the government pays the farmers the difference between modal rate (the average prices in major mandis) and the MSPs. For ex- Price deficiency payment schemes of Madhya Pradesh (Bhavantar Bhugtan Yojana), Haryana (Bhavantar Bharapai Yojana) can be launched as Central Sector Scheme.

2. Market Intervention Scheme- Market Intervention Schemes can be launched, under which the state government procures perishable commodities like vegetable items to ensure minimum assured price to the farmers.

3. Creation of Agriculture infrastructure- Instead of bypassing the market by using MSPs, the government should make efforts to enable farmer participation in the market by creating modern world-class agriculture infrastructure like Cold Storage facilities.

4. Support to the Farmer’s Producers Organisations (FPOs)- Adequate financial support to FPOs, would result in better price realisation for farmers. For ex- Aim to replicating the success of AMUL in agriculture through FPOs.

5. Gradual expansion of crops under MSP- The government can gradually expand the list of crops eligible for MSP support, to encourage crop diversification and reduce the dominance of rice and wheat. This will provide farmers with more choices and promote the cultivation of crops in line with market demand.