Food and nutrition security is critical for the country. Agriculture is the country’s largest private sector enterprise. We have an estimated 120 million farming families and each farmer is an entrepreneur in his own right. Although he is a risk taker, the farmer has historically been challenged and vulnerable to huge uncertainties.
To be sure, agriculture accounts for 15-18% of our national GDP but provides livelihood for over 50% of the workforce. Herein lies its importance.
Even as the country’s agriculture continues to countenance the triple challenge of land constraint, water shortage and climate change, fixing and enforcing the Minimum Support Price (MSP) for specified agricultural crops has been a contentious issue in recent years.
There is widespread belief that the MSP regime as practiced at present has become ineffective and that it deserves a review to ensure it remains in sync with global and domestic realities.
To a recent question in Parliament about steps being taken to address farmers’ demands for a legal guarantee of MSP, the Minister of State for Agriculture replied saying “a committee has been constituted on July 12, 2022 to make suggestions so as to make MSP more effective and transparent”. It is unclear how many times the committee met, what it discussed and what was the conclusion.
Meanwhile, season after season, MSP for crops is hiked which in part is done to compensate growers for rising input costs and to encourage crop diversification. Yet, it is clear as daylight that MSP alone is most unlikely to ensure higher production or higher productivity or crop diversification.
While growers deserve support, a routine hike in MSP season after season will do little to drive crop production and productivity. Yield enhancement needs a special set of policy initiatives including technology infusion. Over the years, MSP has ceased to be an instrument to encourage crop choice or diversification.
Under Indian conditions in particular, agriculture is subject to multiple risks. Weather risk, production risk, quality risk, market risk and price risk are key risks growers face. It is necessary to create conditions for the farmers to overcome these risks.
Crop cultivation is seasonal and regional in nature. During the short marketing period (usually two months), prices tend to collapse because of perceived glut. As our domestic markets are by and large integrated with the global markets (through trade route and investment route) our crop prices often tend to reflect global trends.
So assurance of a minimum price to ensure that the farmer recovers his cost of production plus gets a decent return on investment (time, labour) is necessary. In a manner of speaking, MSP is a kind of sovereign guarantee given by the government that farmers will not be allowed to suffer losses in the event crop price falls below the specified minimum support price.
Look at it differently. MSP is a deemed or unwritten Options contract where the government announcing the MSP is the Options writer and the farmers the Option buyers. If MSP is seen as an Options contract, then the Government has an obligation to buy from farmers in the event crop price falls below MSP; and at the same time, farmer has no obligation to sell (to the government) if price stays above MSP; and the farmer is free to sell in the open market.
There’s another angle. India’s agricultural policy is largely production-centric possibly because of our food security concerns. This makes procurement and distribution a vital element of our welfare programs.
However, MSP not backed by a robust nation-wide procurement system will not yield the desired outcomes. Procurement becomes imperative in the event crop prices fall below MSP.
The current reality is that parastatals engaged in crop procurement (grains, pulses and oilseeds) seem to be unequal to the job in terms of quantities to be procured and geographies to be covered. It is time to enlist the services of the private sector to complement and supplement the efforts of the government parastatals.
Importantly, MSP and crop procurement policy must take into account environmental concerns. It is recognised that grain mono-cropping (rice and wheat) and open-ended procurement at support price is leading to disastrous environmental impacts in some regions of the country.
Indian agriculture calls for a holistic approach. Agriculture must show sustained growth in sustainable ways. Along with MSP we need a robust but nuanced procurement system that helps advance sustainability.
Alongside, an appropriate trade (export / import) policy and tariff (customs duty) policy is necessary. The trade and tariff policies must seek to protect the interests of domestic growers, without compromising the interests of consumers.
MSP has now become more of a political necessity rather than an economic tool to boost farm growth.
We need to reimagine our farm policies and review the working of related institutions. Let us call it MSP ++. It means a combination of MSP plus robust procurement with environmental consciousness plus a judicious export/import policy and a sound tariff policy that dynamically adjusts to global and domestic market conditions.
G Chandrashekhar is an economist, senior journalist and policy commentator, and provides policy inputs for the government. Views are personal
