View: Minimum Support Price, a tricky tool from the past

Despite GoI announcing the repeal of the three contentious farm laws, farmers’ unions have decided to continue their agitation until their six remaining demands that include legally guaranteeing minimum support prices (MSP) are met. MSP is a weapon in the armoury of economists, government, politicians and farmers. It is a useful tool – depending on which side one is placed.

Twice a year, the agriculture ministry announces MSP for all kharif (autumn) and rabi (spring) crops. The reasoning here is that MSP is offered to farmers if they want to sell to the government at the time of harvest and that, in a way, it allows farmers to plan their cropping pattern.

The Commission for Agricultural Costs and Prices (CACP) calculates this price based on the cost of cultivation and adds a markup. In corporate finance terms, the MSP is an option provided to the farmer where he has a right but no obligation to sell to GoI at the time of harvest. Also, the markup is something akin to the return on capital for the farmer. So far so good.

Now, GoI announces these prices and, in the last few years, has emphasised on the return on capital (RoC). Hence, even if the MSP increases by, say, 4%, it will be said that the return over cost is 50% or 70%. This has good announcement effects as it shows that GoI ‘cares’. However, when MSP is increased by, say, 10%, then the cost factor goes to the background and the absolute price is focused on. Hence, this is good advertisement.

The curious case of MSP is that while it is announced for all crops – and gets all people on both sides involved in frantic arguments on the price increase being inadequate (if low) or inflationary (if high) – for all practical purposes, MSP is effective for rice and wheat alone. Hence, while the MSP of maize can be increased, GoI is not there to buy the crop. Or, for that matter, tur or urad.

The reason is that when the MSP was formulated, it was tied to the elaborate Public Distribution System (PDS), which was distribution of subsidised food grains to the needy. So, some 5,00,000 fair price shops (FPSs), or ration shops, were created. The idea was that the Food Corporation of India (FCI), with a staff count of 20,000-odd people, would procure food grains and then store a part according to buffer stock norms and distribute the rest through ration shops.

But the procurement is an open-ended scheme, hence, there are excess stocks held in warehouses. Presently, there are stocks of 65 million tonnes held against buffer stock norms of around 31 million tonnes. So, MSPs for other crops are quite irrelevant as there are no collection systems.

Those from the establishment will project MSP increase from the point of view of the farmers, and will dwell on how their income will increase, and as the nation works for farmers, this is the right way ahead. Those in the opposition will argue these increases to be inadequate, and that even the RoC has not kept pace with inflation. The past few years can be used to buttress this argument. For economists, a sharp increase in MSP will be interpreted as being inflationary. Even where procurement does not take place, the argument is that the market uses these benchmarks and jacks up prices – thus, the inflation.

The protesting farmers assembled at Delhi borders have voiced concern on GoI withdrawing MSP once private sale of food grains is permitted. But this cannot happen as long as we have buffer stock, PDS and FCI, not to mention CACP.

The challenge for GoI is manifold here. There is already a commitment to direct benefit transfer (DBT). This means that at some point, the PDS must be abandoned, as enough studies have shown that leakages are high. Abandoning PDS will make 5,00,000-odd ration shops redundant. Further, the giant FCI will have to be reduced to a dwarf, as maintaining a buffer stock will be its only function. As in the last 20 years, India has never really dipped into buffers stocks. They were relevant in the 1960s when India faced famines and wars. Today, we need to get out of the old syndrome of doom.

But keeping all this in mind, dismantling MSP is hard, considering the market cannot resolve all these (political) conundrums.


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