Is legalising MSP workable? Agri economists talk about the pros and cons

The MSP scheme already exists and has been in existence for more than five decades. A legal guarantee simply provides a legislative co­ver to ensure proper imple­men­tation, argues Himanshu

As thousands of farmers demand legalising the minimum support price regime and the Centre reiterates its offer for talks, Sanjeeb Mukherjee asks two of the country’s leading agricultural economists about the pros and cons

Do you think a legal guarantee for minimum support price (MSP) is possible?

C S C Sekhar: Legal guarantee to MSP is not impossible, but a very difficult and an inefficient solution. First, it is fiscally very expensive. Second, it is almost certain to lead to a large supply-demand mismatch, leading to a huge build-up of stocks in the short run. Third, it is logistically and administratively difficult to manage, because of physical storage and manpower issues.

Himanshu: The MSP scheme already exists and has been in existence for more than five decades. A legal guarantee simply provides a legislative co­ver to ensure proper imple­men­tation. If such a law is enacted, it will be binding on the govern­ment to intervene in the market to raise prices through public procurement as and when the market prices are below the MSP.

Should it be for 23 crops, or restricted to just the few that need a production boost? In other words, should it be a targeted guarantee?

Sekhar: We need to remember that MSP was initially introduced during the Green Revolution of the 1960s to increase production. However, it is now being demanded as an income policy. Price is an appropriate instrument for resource allocation, not income transfer. If increasing the income is the objective, direct income transfers like PM KISAN, conditional or unconditional, are better.

Himanshu: An MSP scheme or law should be for all the crops for which MSP is announced. What is the point of anno­u­ncing MSP if the government does not act on it? But the government is free to top up the MSP with incentive bonuses, as it does for rice and wheat, for those crops where it feels the need to raise production. The MSP guarantee only corrects the regional and crop-specific deficiency in the programme and makes it broad-based and regionally diverse.

What could be the fiscal implication and how can it be managed?

Sekhar: Based on the production and MSPs in 2022-23 and coverage of crops, the expenditure is about Rs 413,000 crore per year if deficiency payments are made for the crops offered by the government, namely, maize, pulses and cotton, in ad­d­ition to rice and wheat. If partial procu­re­ment of these crops is also done, the expenditure is about Rs 435,000 crore.

On the other hand, if all the 23 MSP crops, except coconut, are covered with partial procurement (partial because of storage constraint) plus deficiency payments, the expenditure is likely to be higher, at Rs 484,000 crore per year.

These estimates are based on the current system of computing MSPs, not C2+50 per cent.

Himanshu: It is difficult to predict the fiscal cost as it will depend on the market condition. MSP is designed to protect farmers from price uncertainties. The fiscal cost is only the difference at which the government procures plus incidentals such as storage and transport and the selling price of the procured crop.

Fiscal cost will depend on the strategy by the government to sell the procured agricultural produce. If the government uses it to offload at procurement prices or economic cost at times of high inflation, the cost is negligible. If the government sells the procured crop in international markets at higher than procurement price, it will actually make a profit.

But, if the government uses the procured agricultural produce to subsidise a section of consumers for nutritional and food security purposes, that is a subsidy to consumers which the government will have to incur.

The Centre has recently floated a proposal for assured purchase of five crops, provided the farmers switch away from wheat and rice. How do you see this plan?

Sekhar: As I have already stated, the expenditure is about Rs 413,000 crore per year if only deficiency payments are made for these crops. And if backed by partial procure­ment, the expenditure is about Rs 435,000 crore.

Himanshu: The govern­ment is free to provide any other mechanism it deems fit to incentivise cultivation of certain crops or encourage farmers to diversify. It could be cash transfer, conditional purchase agreement, contract farming, or any other mecha­nism. But none of these is an MSP-related intervention, which is designed to provide price stability.

There is no conflict between these in­i­ti­atives and the MSP programmes. These may be complementary to each other but not a substitute of the MSP guarantee.

Can legal MSP prompt large-scale diversion from wheat and rice?

Sekhar: The rationale for this is not clear to me. MSP is not useful unless supplemented by effective procurement. Also, the need for diversification is acute in some states like Punjab.

Is this offer then limited only to these states? If so, is it fair for pulse-growing sta­t­es? In any case, there is a large and well-established system of procurement in st­a­tes like Punjab for paddy and wheat, and unless such a procurement system is also evolved for other crops, merely legal­i­sing the MSP for a few crops will not help. Also, a system for orderly disposal of the pro­c­ured grains is necessary. Otherwise, there will be a problem of excessive stocks.

Himanshu: Of course! Farmers’ preference for rice and wheat is a result of the inefficiency of the existing MSP scheme, which favours only rice and wheat at the cost of all other crops. Farmers will certainly shift to crops which require less expensive inputs and preserve natural resources as long as there is a guarantee in the form of MSP. As long as farmers are assured that the government will intervene in case of a large price fluctuation, they will shift.

Also, there is debate as to whether the subsidies given to agriculture are in fact consumer subsidies through a different route as it is meant to keep prices down. What is your opinion on the same?

Sekhar: There is one school of thought but I am yet to see any reliable estimates as to how much of the subsidies accrue to producers and consumers. That said, we need to remember that most of the small and marginal farmers are net consumers.

Himanshu: The difference in the price at which the government procures and sells is the subsidy if the selling price is lower than the procurement price. In the case of farmers, they are getting the mini­mum assured price for their produce and therefore it is a value of output for the farmers and not subsidy. Therefore the entire subsidy incurred by the govern­ment is subsidy for consumers whether it is for nutritional support programmes such as NFSA, MDM, ICDS or other programmes including sale to neigh­bouring countries at subsidised prices. 

Agriculture suffers from myriad other problems. Which are the other segments that need urgent attention?

Sekhar: Credit is one area where the small and marginal farmers are hugely handicapped. To overcome this, a basic income may be paid to these farmers, which may be roughly equal to half of their cost of cultivation. Some reliable estimates show this is about Rs 13,000 per annum per farmer, approximately double the present PM KISAN assistance. Thus, I strongly feel the assistance under PM KISAN needs to be hiked, which is a much better option.

Himanshu:  Though a legal MSP guarantee will help them deal with the price risk, it also requires long-term efforts from the government in creating infrastructure for logistics management, transportation, storage, and processing of agricultural produce. The second area where large investments are required is protecting farmers from extreme weather shocks. We also need to revive the agricultural extension programmes with specific focus on encouraging farmers to diversify and adopt climate-sensitive agriculture.