MSP as a Legal Right: Benefits and Challenges

Abstract

It has been widely acknowledged that a system for safeguarding farmers, a vulnerable population of the Indian economy, is essential. This is because agricultural commodity prices fluctuate due to supply changes, market fragmentation, and information asymmetry, which results in unpredictable income and agriculture production cycles. The government currently provides Minimum Support Prices (MSP) for 23 crops, although it has struggled to successfully implement and enforce the policy. The shortfall has culminated in the recent farmers’ protests in 2024, where farmers are demanding the recognition of MSP as a legal right. Despite economists questioning the long-term viability of such a scheme, the Congress Party’s 2024 Lok Sabha election manifesto promises a legal guarantee to MSP for the farmers. This paper thus investigates how MSP with legal bindings will affect the economy, weighing the benefits and drawbacks of the same.

Introduction

Indian farmers have been protesting for increased minimum support prices (MSP) and legal assurances since 2020. Protests erupted in August 2020 against three farm acts passed by the Indian parliament, which farmers felt would leave them vulnerable to large corporations. Following a year-long protest in which tens of thousands of farmers gathered outside Delhi, the government overturned the rules in November 2021. To mitigate these challenges and guarantee stable prices for their crops, enabling farmers to make a reasonable living, the Union Government established an annual Minimum Support Price (MSP) for main agricultural crops on the recommendation from the Swaminathan Commission (Muthyanolla, 2024). However, the farmers’ demands were unmet. In February 2024, thousands of farmers from Punjab and Haryana resumed the protest, congregating outside Delhi to demand a new law that would officially guarantee MSP for 23 crops and higher prices for their products.

What is the MSP in India?

MSP stands for Minimum Support Price. In India, it is a government-set price floor that ensures farmers receive a minimum price for their produce, thus safeguarding their income and boosting agricultural production (Kujur, 2024). It is computed with consideration for intercrop price parity, production costs, supply and demand, and other variables and acts as a buffer against distortions when market prices decline for a variety of reasons (Muthyanolla, 2024). In a free market economy, growers have the option to sell their produce to government procurement agencies or private companies, depending on whose offer offers better terms. However, according to data gathered via AGMARKNET from 3,100 Agricultural Produce Market Committees (APMC) mandis spread throughout several States and Union Territories (UTs), market prices for agricultural products typically fall below the MSP. For rice and paddy, this pattern is noticeable during the Kharif Marketing Season (KMS) in 2018–19 and 2022–2023. Even though the paddy market prices in 2022–2023 trended upward, they were still below the MSP, even as the season came to a conclusion (Muthyanolla, 2024).

How is the MSP as a legal right beneficial to the economy?

The MSP provides a safety net for farmers in India. It takes production costs into account to guarantee farmers are not selling at a loss, shields them from middlemen by giving a government buying alternative, and provides some assurance by establishing a minimum price prior to planting. Overall, MSP wants to make farming a more stable and successful business (Bhatti, 2021). A legally binding MSP means that no one can purchase farm produce below the MSP, and doing so would be punishable by the law. Dr. Shashi Tharoor, a member of the Congress Party, delineated the reasons for pledging the initiation of MSP as a legal right. He claims that if farmers–a substantial portion of the population that lives off the land through farming and farming-related occupations–become self-sustained to the extent that they lead a decent life, it will be highly beneficial to the Indian economy as (1) the price stability will enhance the overall food security of the country and (2) the farmers will be able to invest more in agricultural production, owing to an increase in their income. However, he also acknowledges that MSP is only a part of the problem as other concurrent issues, like depleting soil health and the indiscriminate use of pesticides, continue to pose significant challenges (Think School, 2024). Hence, to reform the Indian agricultural sector, comprehensive steps to address these concurrent concerns alongside MSP are required.

What are the challenges the policy poses?

MSP, a remnant of the green revolution from the late 1960s, has a number of issues despite its appeal to the farmers. Firstly, with a guaranteed price to the farmers, the MSP will incentivise them to increase their supply without paying any heed to the demand in the market. Should the MSP’s requests be fulfilled in full, the overall spending on crops produced by the farmers might reach ?10 lakh crore, or US$133 billion (Bhardwaj, 2024). This will increase the financial burden on taxpayers and divert funds away from other crucial investments. Moreover, the government’s purchase of the surplus produce leaves it with two choices: (1) sell it at a discount to the general public (which will lead to a loss) or (2) store it for future purposes (the number of silos cannot accommodate the surplus, eventually leading to the destruction of crops). Even with the guarantee of MSP, which only benefits major surplus-producing farmers in the leading agrarian regions of Punjab, Haryana, and western Uttar Pradesh and leaves the remainder vulnerable to market fluctuations, farmers’ economic fragility endures. According to an OECD assessment, India’s farm revenue has decreased by about 5.7% over the last three years due to the alignment of trade and domestic policy. This is because of increased competition from lower-cost imports, the farmers’ inability to reach higher-paying international markets and reduced agricultural subsidies to comply with trade standards. These amount to an annual reduction of Rs. 1.7 trillion in “implicit taxation” (Muthyanolla, 2024).

Also, as seen in the past, As parties compete for public support, the Minimum Support Price (MSP) debate frequently becomes tied up in the web of vote-bank politics. But the cost-plus pricing structure of the existing MSP system presents an enormous challenge to the economy. It sets off a brief period of inflation, which may result in an economic disaster. Furthermore, groundwater stress is made worse by the policy’s preference for water-intensive crops like wheat and paddy, highlighting the critical need for agricultural diversification. Although the government has acknowledged this requirement and promised to purchase substitute products like pulses and maize, expanding the MSP policy to include these crops has significant financial ramifications (Kumar, 2024). Therefore, policymakers must carefully manage the budgetary limits and potential economic effects associated with MSP extension beyond staple crops like wheat and rice, even as they work to promote diversification and improve soil health (Kumar, 2024).

To address these issues, the government should consider viable solutions. An alternative to suffering losses or allowing crops to wither away is to think about exporting excess produce. Furthermore, as recommended by Dr.Tharoor, the government should impose initial caps on the amount of crops eligible for MSP in order to prevent an excessive surplus (Think School, 2024). In addition, the government might set up systems to guarantee that the programme helps farmers everywhere, even in states or union territories. This strategy would encourage a fair distribution of rewards and assist prevent a restricted focus on particular economic sectors.

What are the alternatives?

Given the several drawbacks of the policy, it is imperative to understand policy alternatives to achieve the same purpose of sustaining farmers and maximizing agricultural production. Ramesh Chand, an NITI Aayog member, has proposed a deficiency price payments (DPP) scheme as an alternative to MSP. Under this initiative, farmers are rewarded for the difference between the MSP and the real market price (mandi price) at which they sell their crops without the government having to physically acquire the produce. This system guarantees farmers a minimum income while avoiding the logistical and financial challenges of large-scale government procurement. The DPP system is inspired by Madhya Pradesh's Bhavantar Bhugtan Yojana, which was implemented in October 2017 following violent rural demonstrations over declining grain prices (The Financial Express, 2022). Other alternatives range from granting direct cash grants to farmers or subsidies. Some measures, like introducing sustainable loans for farmers, render the government's role obsolete, thereby saving the taxpayers' money (Garg, 2024).

Way forward

Two farmer protests in India during the previous four years indicate a significant dissatisfaction with present agricultural policies, particularly the MSP. The government must design a long-term and equitable solution that addresses both market volatility and farmers' economic security, thereby ensuring agricultural stability and fairness. Furthermore, the "Triple Challenge" that India faces in supplying affordable food, supporting the livelihoods of farmers and other participants in the food supply chain, and tackling serious resource and climate-related issues continues to persist. Finding a sustainable equilibrium that maintains farmer welfare while also taking economic viability into account is critical for Indian agriculture's future success. This necessitates a comprehensive debate among farmers, policymakers, and experts to investigate alternative options and design a course for a sustainable and equitable agricultural system (Bhardwaj, 2024).

References

Bhardwaj, H. (2024). Decoding the minimum support price (MSP): A balancing act for farmers and economy. WION. https://www.wionews.com/business-economy/decoding-the-minimum-support-price-msp-a-balancing-act-for-farmers-and-economy-690895

Bhatti, J. (2021, November 26). Full Form of MSP: Benefits of MSP. GeeksforGeeks. https://www.geeksforgeeks.org/full-form-of-msp/

Garg, S. C. (2024). MSP has outlived its utility. Give India’s farmers a new deal. Deccan Herald. https://www.deccanherald.com/opinion/msp-has-outlived-its-utility-give-indias-farmers-a-new-deal-2911794

Kujur, R. (2024, February 28). Watch | What is the Minimum Support Price? The Hindu. https://www.thehindu.com/news/national/watch-what-is-minimum-support-price/article67894764.ece#:~:text=MSP%20stands%20for%20Minimum%20Support

Kumar, D. (2024, March 8). Switch from rice, wheat, and cane to get MSP on select crops: The government tells farmers. Mint. https://www.livemint.com/economy/msp-ensured-for-diversified-pulses-maize-to-reduce-water-intensive-cultivation-11709906872197.html

Muthyanolla, S. K. (2024, February 29). Data: Decoding the MSP & Procurement of Major Crops. FACTLY. https://factly.in/data-decoding-the-msp-procurement-of-major-crops/

The Financial Express. (2022, July 15). We need to rethink MSP: The time has come to look at alternatives like deficiency payments and direct income support. Financialexpress. https://www.financialexpress.com/opinion/need-to-rethink-msp-time-has-come-to-look-at-alternatives-like-deficiency-payments-direct-income-support/2594438/

Think School. (2024, May 10). Why is Congress giving Freebies and MSP? How did Kerala's Crisis happen? Ft Dr Shashi Tharoor: IBP Ep6. YouTube. https://www.youtube.com/watch?v=bQMG4fJZiAk&rco=1&ab_channel=ThinkSchool