On legalising MSP: Supporting farmers

News: Farmers are now protesting for a legally guaranteed minimum support price (MSP)

In terms of policy intervention, it is well accepted that incomes in the farm sector have fallen behind, compared to other sectors of the economy, and farmers need to be fairly compensated.

But a legal price guarantee is not the solution. There are a number of valid reasons why it should not be accepted.

Why MSP should not be legalised?

Market distortion: Guaranteed MSP will incentivise farmers to grow only those crops and neglect others. This will create an imbalance in the market. As a result, there will be a large surplus of some crops and a shortage of others.

Affect small farmers the most: it has been suggested that private traders be mandated not to buy below the MSP declared by the government. This will kill private trade in agriculture, and small farmers will be left with unsold surpluses.

What is the way forward?

The government needs to find less distorting means to compensate farmers. In this context, Income transfer could be a better option.

The already existing cash transfer scheme for farmers, can be modified to account for the level of landholding.

Further, government need to find ways to bring tenant farmers and agricultural labourers into the net.

Finally, the government would need to engage more widely with all stakeholders  to be able to make the right policy interventions.

Source: This post is based on the article “Supporting farmers” published in Business Standard on 1^st Dec 2021.