MSP — A Boon or a Bane?

What is MSP (Minimum Support Price) — A layman's perspective

Photo by Darpan Sharma on Unsplash

MSP simplified

Before we get into the details lets first understand a few terms and concepts required to demystify the purpose of the Minimum Support Price supporting certain agriculture produce, instrumented by the Government of India.

Here we go!

Sectors of the Indian Economy

There are 3 main sectors in the Indian Economy, viz-a-viz:

1. Primary Sector: Agriculture, Livestock, Mining, Forestry, Fisheries, etc
2. Secondary Sector: Manufacturing, Construction, etc
3. Tertiary Sector: Services which include IT, hospitality, healthcare, etc

Ownership-wise we can divide the Indian Economy into the Private sector and Public sector, while the operations are by and large categorized as Organized and Unorganized.

Trivia: It is interesting to note that as per the Economic Survey 2019, the ‘unorganized’ sector accounted for more than 90% of the Indian workforce. These include plantation workers, fishermen, construction labourers, weavers, domestic workers, drivers, delivery persons, waiters, vegetable and fruit vendors; The list is endless.
Ironically, though their representation is huge, their standard of living, economic security, and the benefits they derive are abysmal.

India’s journey in the Agriculture Sector

India began as a predominantly Agrarian nation post-independence. In 1965, due to the dedicated involvement of Agriculture scientists, especially the Geneticist M.S. Swaminathan, we saw the beginning of a ‘Green Revolution’, where much impetus was put on improving the Rural economic growth. Even to this day, 2/3 rd of the Indian population still reside in rural areas. Though the Agri sector has been in a decline over the decades, it forms an important cog in the wheel of the Indian Economy.

As stated by the Food and Agricultural Organization (FAO)of the United Nations

“Agriculture, with its allied sectors, is the largest source of livelihoods in India. 70 percent of its rural households still depend primarily on agriculture for their livelihood, with 82 percent of farmers being small and marginal.”

The Agri sector is almost completely dependent on the Informal labour force. Many are migrant workers who are employed only on a seasonal, contract, or temporary basis and as a result, are more sensitive and vulnerable to economic disruptions.

GDP (Gross Domestic Product)

The GDP is an internationally recognized metric and is used as an indicator of a countries economy and growth in a given period of time. By definition, it is the ‘monetary value put on all finished goods and services within the boundaries of a country’. This is only for physical goods and services, hence intangible services like digital experiences, wellness, environmental, sustainability etc are not captured.

Simply put it shows the total spendings from individuals, businesses, and the government along with the country's net exports.
Note: If a countries imports are higher than their exports, it reflects a negative net export value which lowers the overall GDP. Hence the inclination to ‘make local’. The “Make in India” Government initiative is one such effort.

Picture Source:https://investinganswers.com/dictionary/g/gross-domestic-product-gdp

With respect to India’s GDP, the top three: Services, Industry (Manufacturing), and Agriculture have consistently held their ranks over the last decade 2009–2019 as clearly depicted below.

Source: https://www.statista.com/statistics/271329/distribution-of-gross-domestic-product-gdp-across-economic-sectors-in-india/

Of all the sectors, the Services sector is the most dominant, providing a healthy 49 % contribution to the overall GDP, with the Manufacturing and Construction claiming a 24% stake and Agriculture held steady, around 15%.

GVA (Gross Value Added)

GVA is an important factor in arriving at the GDP. Policymakers are more closely looking at this data point when analysing growth. Here’s why:

GVA = GDP + Subsidies — Taxes

We know that Subsidies favour some sectors/ industries while Taxes handicap others. (Remember how GST continues to be a thorn in the flesh for most sectors?). Therefore the GVA parameter can better calibrate the economy: let's say, we see a spike in output, but from GVA, we can identify that this is primarily due to higher tax collections, which was because the government had increased taxes or due to better compliance resulting in replenishing of the coffers!

Since GVA includes the primary income, it reflects the economic ‘welfare’ ’of the people. Hence a sector-wise breakdown helps policymakers decide on which (sub)sectors need a shot in the arm in the form of incentives/ subsidies.

Trivia: The COVID crisis (Q1 2020) saw a dramatic freefall across all sectors, except the Agriculture subsector, where the GVA actually rose a respectful 3.4 % during the tense summer months.

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MSP (Minimum Support Price)

So finally we can now dive into the discussion of what the MSP is all about.

If the seeds of growth were sown in 1965, with the visionary plans of the Green Revolution, the fresh sprouts were to be seen post-1966–67, when the Agriculture Price Policy (APP) introduced the MSP initiative. Wheat was one of the first crops to come under its wings, thus providing a safety net for the farmers, who were then assured of a guaranteed (minimum ) price. Needless to say, at the time, it boosted the Agricultural Sector immensely.

How it works:

• There are two seasons in India where the Kharif (Monsoon/ Rainy season) crops and the Rabi (Winter/ Dry season) crops are sowed
• As of 2019–2020 there are a total of 24 crops (6 Rabi, 14 Kharif, and 4 commercial) identified for MSP
• These include Cereals like wheat, paddy, millet, maize, Pulses like tur and urad dhal, and Oilseeds like mustard, groundnut, and sunflower seed to name a few. Commercial crops include jute and cobra (coconut). Refer to the latest list here.
• The Government announces the revised MSP every year, well before the start of each season, so that the farmers get sufficient time to do a cost-benefit analysis, and decide which crop to sow in lieu of the returns they forecast.
• Based on the recommendations of the Commission for Agricultural Costs and Prices (CACP), the MSP rates are revised for every season.
• The CACP considers many factors before arriving at the MSP for a given crop. This includes trends in the domestic and international markets, cost of production, effect on cost of living, demand and supply amongst other things.

Remember
[1] GDP gives the demand/consumers perspective.
[2] GVA gives the supply/ producers perspective.

• The State Government regulates and operates via the Agricultural Produce Market Committee (APMC) which are Yards/Mandis in the local market area.
• The paternalism intention of APMC was to ensure farmers, many who might be illiterate, are not exploited by creditors and other middlemen, due to asymmetrical information, one of the causes of market failure.

Benefits of MSP

• The major objectives are to safeguard the farmer's interests during price fluctuations and avoid distress sales, especially when there is a bountiful harvest to enjoy.
• The food grains procured by the Government at the guaranteed (MSP) price is then redistributed to the public in the form of rations, or relief as was seen during the recent COVID crisis, thus ensuring the needy benefit in this vicious circle of demand and supply.

Trivia: India was ranked 102 out of 117 countries in the Global Hunger Index released in 2019, reflecting how serious the situation is on the ground, where many can’t afford 3 meals a day.

• It encourages the farmers to invest further on their lands and try adopting newer technologies like modern farmer equipment, irrigation methods, high yielding variety seeds, pesticides, and fertilizers etc.

Drawbacks of MSP

Here is where the ‘law of unintended consequences’ spreads its tentacles yet again. Just like any new policy introduced with the righteous intentions to solve a problem, the ‘self-interest’ of the human mind, identifies the loopholes, and exploits it.

• The MSP policy has resulted in an excess of both wheat and rice production and procurement of by the government over the years. The demand curve shifts right. However, instead of letting ‘market forces’ take its normal course (cob-web theory), and allowing the self-regulating of prices to reach its equilibrium/ stable price, the Government intervention in fixing the prices, can have a detrimental effect to the armer (depending on the farmers pecking order in the hierarchy). Refer below:

Source:https://www.bbc.com/news/world-asia-india-46640789

• Every time the MSP is corrected upwards, its the bigger farmers with commercial setups and many hectares of land that cash in. The marginal farmers who account for more than 3/4th of the Indias Farming community, and who might be growing other (non-MSP) earmarked crops like tomatoes, greens, and onions for their own livelihood, suffer as they depend on the market for other essential commodities, whose prices are only increasing with each MSP revision.
• We need to keep in mind too that the marginal farmers, who are the vast majority, typically don’t always own their land, hence they have many overheads (land rent/ lease, labour, operational costs etc). To compound this, most rural farmers have large families, so the little they grow, they use for self consumption. Their surplus (if any) is minimal, and even if they grew any of the 24 MSP identified crop, they don’t really benefit from this initiative.
• The inelastic demand of these MSP favoured essential crops i.e. cereals, pulses and oils, all which are so much part of our daily diets across India, only exacerbate the rich and poor divide.
• The detrimental impact on the environment can’t be discounted. Example: Farmers in drought areas like Punjab and Haryana are looking to grow water-intensive crops like rice and sugarcane thus depleting groundwater levels.
  The health implications due to excessive pesticide use in different regions over the past 30-45 years have led to high toxin levels of lead, mercury, and uranium in rural communities. Villages in Punjab have younger generations suffering irreversible damage caused by this.
  This is definitely not sustainability in the long run.

To wrap up, I would like to highlight that we can see that while MSP brought in reforms that fueled the Green Revolution, the question is, has it run its course? Will the new Farm Bills introduced in 2020, dispel the fallacy that only a few farmers will benefit? Shouldn’t sustainability be a key criterion in all policymaking especially with the urgency of the United Nations Sustainable Development Goals (SDG) 2030 deadline?

This mention in the paper, with an equally thought-provoking title “Raising Agricultural Productivity and Making Farming Remunerative for Farmers” by NITI Aayog, provides some food for thought.

[APMC, intermediary players, fragmented market chains]….This is depriving farmers of fair share of the price paid by the final consumer. Consequently farmers are seeking MSP for almost all crops and everywhere, which is not feasible. There is a need for paradigm shift from price centric direct intervention to non-price policy instruments. The aim should be to create enabling market environment for produce for higher price realization for farmers.

Disclaimer: The above points are not all-encompassing and are merely an attempt by the writer to throw some light on MSP (in the context of the Indian Agri Sector).

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