In today’s Finshots, we tell you why farmers are annoyed with the government and whether their demand for a Minimum Support Price is economically viable.

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The Story

Farmers from Punjab, Haryana and Uttar Pradesh have all been marching towards Delhi. Their demand — a Minimum Support Price (MSP) for their crops!

But what’s the deal with MSP, you ask?

Okay, so imagine that farmers have a bumper harvest. Crops are bountiful. And while you might think that’s great for the farmers, you would be wrong. What happens when there’s an oversupply of a commodity, but demand remains the same? Price will fall, right? So when farmers try to sell their produce, they hit a roadblock. Often, the excess supply will push prices so low that they may not be able to even cover their cost of production. They’re better off destroying the crops rather than paying additional charges to transport them for sale.

To counteract such situations where farmers face losses, the government introduced* something called MSP. The idea was simple — every year, they’d buy certain crops from the farmers and store them for later use. And they would do this for 22 mandated crops. These crops would be distributed under various ration schemes. Or the government would keep it for a rainy day, say when a bad monsoon hurts crop supply.

But how would this MSP be calculated?

There’s a whole host of parameters. There’s the production cost for a crop which includes seeds, fertilisers, labour, machinery and fuel. It takes into account the value of family labour. And also, an approximate rental value of the land.

And by factoring in these costs and offering farmers a minimum price, they’d be protected from market losses. At least, in theory.

But here’s the thing. The MSP procurement isn’t codified under any law. So the government can turn their back on it at any point in time. Sure, you could argue that they won’t since there will be political repercussions, but it’s still possible.

And that’s the primary demand of the protesting farmers. They want a law enacted around MSP.

One reason for that could be because an MSP doesn’t mean the government ends up buying all the produce. It buys a limited quantity based on how much it can store and distribute within the country. And that also majorly benefits two crops ― wheat and rice. So the folks farming the other crops can still often be left in a lurch.

So here’s a question to think about ― Is legalising MSP a feasible idea?

Well, it’s not an easy answer, so let’s look at the arguments from both sides.

For starters, most media reports will tell you that only about 6% of farmers in the country benefit from MSP. Now even if that’s a poor estimate, other figures peg it at 15%-25%.

And that still doesn’t seem like much. Because agriculture is still at least 15% of India’s GDP. And it generates employment for close to half of its population. So without adequate support, farmers may lose money, they may end up in a debt spiral, and many of them might even be forced to leave farming altogether.

That won’t bode well for our economy, no?

Also, an MSP guarantee will likely help with crop diversification.

Just think about it. If the government only favours procurement of paddy and wheat simply because they need more of it to supply food to the poor, farmers will switch to producing only those crops. It could take a toll on the environment as paddy is a water-guzzling crop.

Add to that the fact that both crops contribute heavily to stubble burning in the north because they leave residue in fields which need to be cleared before the next sowing season, and it’s a perfect recipe for environmental havoc.

So yeah, MSP could encourage farmers to grow a variety of crops, especially since the government wants to focus on growing millets.

But there’s the flipside too.

If MSP is legalised, that will mean no one can pay less than MSP to buy a crop. And that will distort the demand-supply scene. At least that's what Ashok Gulati, a leading agricultural economist, suggests. His argument is simple — If there’s an oversupply of crops in the market and prices fall, people still have to buy crops at the minimum price set by the government. Anyone buying at prices below the legal MSP could face legal action.

Another thing that you can’t ignore is how much a guaranteed MSP law will cost the government. The government could end up spending anywhere between ₹6-₹9 lakh crores with a law like that. That is around the annual average government spending on infrastructure development over the last 7 years. It could take a toll on the government’s coffers and it may be left with no money for other developmental activity. And all of that seems quite impractical.

So, what’s the solution then?

Well, some folks suggest that we let the farmers sell their crops in the open market. And if that ends up being lower than the MSP the government calculates, then the government could compensate them for the difference between the two values. That will not only reduce the monetary burden but also free up the need for building massive infrastructure for storage.

But mind you, people have already found a way to scam this system. In 2017, the government of Madhya Pradesh experimented with a similar plan. But it soon realised that traders had found a way to rig prices and show crops trading at prices below an average set price. It was a way to fleece the government.

So that’s why a few others say that direct income support to farmers is better. Say a fixed amount of money based on their landholding to carry on with their livelihood. There’s already a scheme called PM-Kisan that does this, so it’s about extending it even further.

Now we don’t know how this will turn out. But it looks like the MSP debate will be stuck in limbo for a while now. One can only hope for an amicable solution to emerge soon.

Until then…

*When the government first introduced MSP in India in 1966-67, it wasn’t due to an oversupply of crops. On the flip side, it was to encourage farming for certain crops. See, India wasn’t producing enough cereal to feed a large population post-independence. However, farmers were hesitant to produce crops like paddy and wheat simply because they wouldn’t fetch fair prices from the market despite requiring a lot of labour. So, the government introduced MSP as an incentive to encourage farmers to produce these crops to feed the country. And it was wheat that first got an MSP at ₹54 per quintal (100 kilos).

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