Real Cost of MSP For All Crops

News: Even as the central government has announced its withdrawal of the three farm laws, the demands for legalising MSP have grown stronger.

Why Legalising MSP is a bad idea?

Firstly, The expansion of MSP would impose trillions of rupees worth of additional burden on the taxpayer in the forthcoming decade.

With the current procurement already well in excess of storage capacity, the extension of MSP to all output can be done only in the form of a deficiency payment. However, deficiency payment need to be calculated on the basis of:

– Hectarage devoted by the farmer to the crop,

– Difference between the MSP announced & The market price of the MSP crop.

– Reasonable estimates of the average yield per hectare

This has the following implications

One, Farmers sell only a fraction of their output of these crops in the marketplace, keeping the rest for self-consumption.

Evidently, under full-MSP coverage, the deficiency payment would have to be made not just on the output the farmer sells in the market but also on the part kept for self-consumption. This imposes additional and irrational cost on the taxpayer.

Two, since legalising MSP will fully eliminate price uncertainty for all farmers, every farmer will try to increase their annual output . This increases supply, and would lead to a progressive decline in the market price and a corresponding increase in deficiency payment.

Add to this the fiscal burden of the extension of MSP to the entire output of the remaining 21 crops. With minuscule or no procurement currently, It will definitely result in the increase of deficiency payment over time.

Secondly, India’s MSP payments already violate the World Trade Organisation (WTO) rules on subsidies.

A temporary peace clause on public stockpiling for food security has so far protected India from retaliatory actions.

But the peace clause cannot provide a cover against the deficiency payments because

– Deficiency payments would have nothing to do with stockpiling for food security.

The extension of MSP to the numerous commodities are not even a part of the public distribution system.

For more info, kindly read these articles

– On legalising MSP: supporting farmers

– Legalising MSP: Challenges and way forward – Explained, pointwise

– MSP is no silver bullet to boost farmers income

Source: This post is based on the article “Real Cost of MSP For All Crops” published in TOI on 9^th Dec 2021.