Rise in MSP – All you need to know!

Let us first understand what Minimum Support Price (MSP) is. It is nothing but the price at which government purchases crops from the farmers, irrespective of the market price. This acts to protect the farmers against any huge fall in price when supply is more than demand. These prices are announced before each cropping season.

The Union Cabinet recently approved a steep rise in the MSP of 14 kharif crops (paddy by 13%, jowar 42%, bajra 37%, ragi 52%, and maize 19%), giving farmers a return of 1.5 times on their cost of production, in order to address farm distress and improve the quality of life of farmers. For pulses, the hike is 4% for arhar, 25% for moong and 3.7% for urad. Among oilseeds, soya bean is up 11.5%, niger seed by 45% and, groundnut by nearly 10%. For medium staple cotton, the MSP increase is 50% over the cost. For tur and urad, it has been up to 66% over their production cost and for oilseeds, the increase has been 50%.

The increase in MSP for paddy (Rs 200 per quintal) is expected to cost the national treasury around Rs 12,000 crore - 15,000 crore. The previous highest hike was Rs 170 a quintal in 2012-13. It will mostly apply to paddy and pulses but will also benefit millets. The hike is significant as it covers the crop which constitutes over 50% of the total acreage of food grain crops during Kharif season. The biggest increase (40-50%) is for coarse grains planted by the poorest of farmers, mostly in unirrigated areas.

While on one hand, where the higher MSP along with a forecast of normal monsoon could help boost output of foodgrains, improve income of farmers and their quality of life, it can also fuel food inflation on the other hand.

It is to be noted that MSP hikes in the past have never been passed down to the farmers fully; therefore, the government backs the increase with a procurement mechanism. Also, since FCI (Food Corporation of India) procures only wheat and rice for distribution through public distribution system (PDS), the government wants to put in place a new mechanism for other crops as well. Niti Aayog has proposed the option of three models for States–

1) MAS (Market Assurance Scheme) will be implemented by state governments which will enter the market depending on the local conditions and procure through their own state agencies or, state-authorized private agency. While the States will be responsible for procurement and liquidation of the procured commodity, the Centre will compensate the operational loss.

2) Under the Price Deficiency Procurement Scheme, if the sale price is below the model price, farmers would be compensated with the difference between the MSP and actual price, subject to certain conditions and ceiling.

3) Engagement of the private sector in MSP-linked procurement through a transparent online platform has also been proposed, where the States would be allowed to let private firms purchase the produce through a bidding process when prices fall below the MSP. For this, private firms would be given tax incentives and a commission.

It has been said by the government that the provisioning which has already been made for food subsidy would be enough to absorb the cost without breaching fiscal deficit target. It includes all paid-out costs such as those incurred on account of hired human labour, machine labour and rent paid for land leased along with expenses incurred on use of material inputs.

Impact on international prices: This hike is expected to increase international prices of rice and cotton that are exported from the country. India which is the largest exporter of cotton should see cotton prices firming up. This might lure MNCs to enter the domestic market. Moreover, exports of raw cotton will suffer as a result of losing low cost advantage.

Though MSP doesn’t cover basmati, its price will have to increase or farmers will prefer producing more of the more-margin providing variety.

Impact on Inflation: This increase in MSP can potentially lead to price rise and thus, food inflation, consequently increasing the need for a rate hike in the upcoming MPC meeting.

Despite the steep hike, farm activists don’t seem to be very elated. According to them, the increase is ineffective as it will hardly improve income of farmers given the rise in input costs including diesel, taxes on fertilizers, farm equipment and, cost of cultivation. Their argument is that the MSP is calculated on the costs incurred in the previous year and thus, fails to incorporate any rise in expenditure in the current year.

To ensure that this hike is passed on to the farmers, the government needs to strengthen the procurement mechanism especially in states like Bihar and UP; where grain purchase is mostly by private firms and compensation is very less. As of now, large quantity of food grains comes from UP and Bihar for consumption in Haryana and Punjab. The government plans to announce the procurement mechanism later.

The actual impact of this hike may vary depending upon how well it is passed on to the farmers. A proper procurement mechanism in place remains the key.


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