By Anushree Jois
The central government is presently in consultation with state governments to launch a new price support scheme for farmers to prevent distress sales below the assured Minimum Support Price (MSP). The proposed scheme comes against the backdrop of a record harvest of cereals and pulses in 2016-17, which led to wholesale prices dipping below MSPs. The new scheme will be implemented with the consensus of state governments.
What is MSP?
The Indian economy is largely agrarian and agriculture is a risky business. Farmers, on most occasions, would not know how much their returns would be against their investment. The uncertainty of weather and market conditions often affect their returns. In order to assist and secure farmers against the backlash of a steep reduction in price and to provide an incentive to continue to grow crops, the government has in place the system of MSP since 1960’s. MSP insures farmers against distress sales and assists in procuring food grains for public distribution.
The centre announces MSP at the beginning of the sowing season every year. Those years in which the price of the produce falls below the MSP, the state government or their agencies are expected to step in and purchase the produce at the announced MSP. In the absence of such a guaranteed price, there is a concern that farmers may shift to growing other crops causing a shortage of these essential commodities.
Distress sales and protests
During the year 2016-17, the centre had announced MSP before the sowing season. Various states were blessed with monsoons and expected rural prosperity to follow. On the contrary, the bounty production led to a price crash. The farmers were unable to recover even the cost of investment in seeds, fertilizers and equipment. Such investment often being sourced through loans, the farmers not only suffered losses but were also left with loans to repay.
Farmers were driven into distress sales. This led to protests in many states, which included burning of vehicles and dumping their produce on roads. State governments such as Uttar Pradesh, Maharashtra, Madhya Pradesh, Punjab and Karnataka announced farm loan waivers, while few other states have launched their own price support schemes for farmers. The state governments have ensured better prices to the farmers for their produce. These incidents also had repercussions on the political stability of state governments and state elections. For instance, in the recent state elections at Gujarat, the BJP led government did not secure many votes from the rural areas.
Scheme of things under MSP
There was a need to have in place a price policy for agriculture due to various factors such as food scarcity, price fluctuations due to natural calamities and international prices for exports and imports. The present price support mechanism was framed with the objective of making food grains available at reasonable prices for consumers, securing minimum income to farmers. It also aimed at providing food grains through the public distribution system and inducing use of better technology for increasing the yield.
Presently, MSP covers close to 24 commodities, including several kinds of cereal such as paddy, wheat, barley and ragi and pulses such as arhar and moong and oilseeds such as groundnut, mustard and sunflower seed and other commodities such as copra, raw cotton and raw jute. The Commission for Agricultural Costs and Prices (CACP) is entrusted with the responsibility of making recommendations on the price policy. This will be done to evolve a balanced and integrated price structure keeping in perspective the overall needs of the economy and the interests of the producers and the consumers.
Areas of concern
Despite its good intentions, much discontent has been expressed over the present MSP. The MSP is not based on production costs incurred. The regions where the costs of production are much higher than the MSP, the system itself proves futile. Further, while improvements are being made in food production techniques, the income of farmers have remained almost stagnant. There is a need to increase the MSP of various commodities.
Under the present system, there is a disproportionate procurement of crops from farmers. Wheat, rice and sugarcane retain focus, while pulses and oilseeds tend to be sidelined. The Economic Survey for 2015-16 highlighted that out of the then 23 crops covered by MSP, effective MSP-linked procurement disproportionately occurred mainly for wheat, rice and cotton. Also, the survey suggested that there is lack of awareness amongst farmers of MSP and its benefits, which has benefited the middlemen.
The proposed market assurance scheme
The new scheme proposes to strengthen the procurement mechanism to ensure that farmers do not suffer from marketing inefficiencies. Under the new scheme, the states would be free to procure crops from farmers for which MSPs are announced, except rice and wheat, which are already being procured by the centre for the public distribution system. It would be at their behest that the decisions concerning the type of crop, quantity and purpose and its use will be taken. The centre would also compensate states for any losses capped at 30% of the procurement cost. The proposed scheme will ensure an assured price for the farmer, mitigating the price risks faced by farmers after harvest.
The newly proposed scheme, however, does not focus on horticulture. Also, the new scheme expects state governments to not only procure and distribute rice and wheat, but also other pulses and oilseeds. At present, there are no other schemes of the centres that assist the state governments in distributing the remaining commodities. There is a need for creation of new schemes or expansion of current schemes to carry out a proportionate distribution of all grains.
The real issue
Irrespective of changes that are being proposed, the real issue of ineffective supply chain management, if not addressed, will render the whole decision trivial. Rural infrastructure is mostly neglected and has a direct impact on marketing the farmers’ produce. There are not sufficient government outlets in place, where the farmers can easily sell their produce and resultantly they are often dependent on middlemen. Development of accessibility would enable farmers to approach multiple markets during bumper seasons instead of resorting to distress sales.
Agricultural continues to be affected by vagaries of monsoon. India has less than 35% of its arable land under irrigation. The need for development in irrigation facilities including canals and rainwater harvesting, cannot be more undermined. There is also a need to make farm insurance more affordable to mitigate distress sales. Further, there is a huge dearth of storage facilities and warehouses. Farmers are left with no choice but to sell their produce at pittance due to fear of perishability.
What can we expect?
The new scheme proposes to strengthen the procurement mechanism to ensure that farmers do not suffer from marketing inefficiencies. As the complete details of the scheme are unknown, to assess the impact of the proposed new scheme at this stage may be premature. The solicitude, however, should be on reforming the functioning of agricultural markets, prevention of price distortion and having a functioning supply chain in place. The formulation of a namesake scheme without addressing the real issues will not alleviate farmers in distress. The centre should also look into existing initiatives of various state governments such as market intervention scheme and price support scheme and provide greater support to their implementation.
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