The minimum support price, a price floor system that assures a minimum price for crops with high yield through procurement by the government, has become one of the major points of contention for farmers who are protesting against the newly passed farm laws.
Protesters and critics claim that the farm reform laws dismantle the existing APMC mandi system through a corporate takeover, and remove the price stable environment that were beneficial to the farmers. Supporters of these laws resonate with the government's claim that the increased access to the open market brought about by these laws will provide a better price to farmers for their yield. While Prime Minister Narendra Modi has claimed that the ongoing protests are a result of misinformation by opposition parties and groups having vested interests, other experts have blamed lack of communication by the government while assuring that the new laws do not pose any threat to the MSP or government procurements.
However, the issue of MSP is a lot more complex, and its influence on farmers can greatly vary depending on the crop and the state.
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What Is MSP And How Is It Calculated?
MSP is a 'minimum price' assured to farmers by government agencies upon the procurement of certain crops, to ensure that farmers are rewarded with profit, particularly in cases of high yield. It is a type of market intervention by the government to protect producers from sharp price falls in cases of bumper crops, and also procure foodgrains for the public distribution system.
MSPs for supported crops are announced by the government at the beginning of the sowing season with recommendation from the Commission for Agricultural Costs & Prices (CAPC) of the Ministry of Agriculture. The CAPC currently recommends MSP for 23 crops: 7 cereals (paddy, wheat, maize, sorghum, pearl millet, barley and ragi), 5 pulses (gram, tur, moong, urad, lentil), 7 oilseeds (groundnut, rapeseed-mustard, soyabean, seasmum, sunflower, safflower, nigerseed), and 4 commercial crops (copra, sugarcane, cotton and raw jute).
The MSP is set at a level to ensure a profit well beyond the cost of production. During the 2018-2019 Union Budget, former Finance Minister Arun Jaitley announced that the MSP will be set at 1.5 times the costs of production. To calculate the costs of production, the CAPC uses three formulas: A2, A2+FL and C2.
A2 refers to the actual paid out cost, A2+FL refers to the actual paid out cost and the imputed value of unpaid family labour, while C2 refers to the comprehensive cost of production which includes A2+FL along with imputed rent and interest on owned land and capital.
While the C2 is the recommended formula to ensure that MSP guarantees the 50% profit over cost of production, as recommended by the National Commission of Farmers, chaired by Professor M.S. Swaminathan, Jaitley had announced that the government shall consider the A2+FL formula instead.
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Procurement By FCI, State Agencies
Once the MSP is set, the Food Corporation of India under the Ministry of Consumer Affairs, Food and Public Distribution, along with other state agencies undertake the procurement of crops at the recommended MSP. Currently, the MSP system and procurement is only implemented for wheat and paddy crops.
How much grains are to be procured largely depends on state level implementation, and therefore varies from state to state. In this regard, Punjab is a state that stands out in particular.
While Punjab is the second highest producer of paddy after West Bengal (contributing 11.5% of the country's paddy production) and the second highest wheat producer after Uttar Pradesh (contributing 17.9% of the country's wheat production), the government gets nearly 65% of its paddy procurement and 32.6% of its wheat procurement from Punjab.
Madhya Pradesh also contributed to 33.2% of the government's wheat procurement in the rabi market season of 2020-2021.
The implementation of MSP and procurement by the government differs from state to state. The market price of the crops are also affected by procurement of the said crops at MSP - in places where considerable amounts of wheat and paddy are procured at MSP (like in Punjab and Haryana), the market price in is line with the MSP. In contrast, in places where there are low or no procurement, the market price remains well below MSP.
Therefore the implementation of MSP and guarantee of procurement generally tends to benefit farmers by incentivising private players to raise the prices to compete with the government in purchasing wheat and paddy from farmers.
Are The Fears Justified?
One of the laws passed, namely the Farmers' Produce Trade and Commerce (Promotion & Facilitation) Act, permits the establishment of markets beyond the premises of Agricultural Produce Market Committee. It creates a new space for trading, and prohibits the tax that was earlier levied by state on farmers and traders, for purchases outside the APMC mandis.
Protesting farmers fear that if there are two markets - one which levies tax (the APMC markets) and another which has no taxes, then the trade will ultimately shift to the latter. Furthermore, if states do not receive any more taxes to run the mandis, it maybe pushed to dismantle the APMC system entirely.
Rural affairs journalist P Sainath, while speaking to Rajdeep Sardesai on India Today , claimed that the protests have aggravated, especially in Punjab and Haryana, because of a perceived threat to the existing mandi system and guaranteed procurement in these states, which has been made worse by the confrontational nature of the government. He also added that "passing a higher MSP is meaningless, if it is not backed up with a guarantee of procurement".
Speaking in support of the farm laws was agricultural economist and former CACP chairman Ashok Gulati, who believes that the protests are mainly a result of misinformation and communication failure from the government. Speaking on the price stability, Gulati said, "There is a need to stabilise the markets - all these things will happen through the private sector." Gulati gave the example of the poultry and milk industry, which are growing at a much higher rate than cereals, to state that bringing farmers and companies will not create an unstable environment where farmers will lose out.
However, for the protesting farmers, the uncertainty brought about by the perceived threat to the APMC mandi system (especially in Punjab and Haryana where the mandis are highly active), and an underlying mistrust towards big corporations in an environment without any regulations, are yet to be addressed by the government. Furthermore, there has been no assurances of procurement for high yield crops like wheat and paddy, which dominate the fields of these northern states.
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The possibility of a halt in government procurement at MSP also poses a threat to the public distribution system (PDS). According to the National Food Security Act, 2013, the government is supposed to provide subsidised food grains (mainly wheat, rice and millet) to at least 67% of the population. India already fares badly when it comes to hunger -this year the Global Hunger Index report ranked India in the 94th position in a list of 107 countries, despite having a food surplus.
In response to such fears, Modi has stressed that the "system of MSP will remain" and "government procurement will continue" - a statement the administration has consistently made since the passing of the farm laws to assuage the rising tide of protests. However, farmer groups demand that the administration include the guarantee of procurement at MSP in the farm laws itself.
