Farmers’ Protests and the MSP Dilemma | S N Tripathy

Farmers’ protests have again taken centre stage in national headlines, marked by peaceful demonstrations and unfortunate incidents. At the heart of these protests lies a crucial demand from the farming community- a legal guarantee of Minimum Support Price (MSP) for their crops.

The concept of MSP stems from the Green Revolution era. Its primary objectives are to ensure food security and provide price support to farmers. MSP was designed as a policy instrument to incentivize farmers to adopt modern production technologies, serving as a floor price for surplus produce.

The government sets MSP, to establish a floor price for specific agricultural commodities. The primary objective behind MSP is to assure farmers that their produce will fetch a minimum price in the market, irrespective of market fluctuations. MSPs are typically announced before the sowing season to provide farmers with clarity on the expected returns for their crops. MSP ensures farmers a minimum income guarantee for their produce. This stability allows farmers to plan their cultivation cycles, invest in better inputs, and manage their finances more effectively. Agriculture is inherently risky due to weather conditions, pests, and market fluctuations. MSP acts as a safety net for farmers, reducing their risk exposure to price volatility in the market. MSP incentivizes farmers to produce more supported crops since they are assured a minimum price. This can contribute to increased agricultural output, essential for food security and economic growth. With the assurance of MSP, farmers are less dependent on intermediaries like intermediaries or traders who often exploit their vulnerabilities during price negotiations. MSPs can influence the overall price levels in the economy, particularly for essential commodities. By stabilizing prices at the producer level, MSPs can contribute to controlling inflationary pressures in the market. MSPs play a crucial role in ensuring social welfare by safeguarding the interests of small and marginal farmers who might otherwise struggle to compete in a market dominated by more prominent players.

Despite these potential benefits, MSPs also have their challenges and controversies: Maintaining MSPs requires significant financial resources from the government, which can strain fiscal budgets, particularly in developing countries. However, its implementation is selective, focusing primarily on a few crops and regions.

While MSP is officially announced for 23 crops annually, its practical implementation is limited to only a handful. The most actively procured crops include rice, wheat, pulses, and cotton. In 2019-20, 80 per cent of rice procurement came from seven states, while almost all wheat procurement occurred in just five states. This centralized approach to public procurement has consequences, discouraging crop diversification in specific regions and hindering the development of agricultural markets in states like Punjab and Haryana.

Interestingly, the largest rice and wheat production states, such as West Bengal and Uttar Pradesh, contribute only a fraction of the total public procurement. This stark imbalance further widens the gap between the quantity produced and the quantity procured by public agencies in many states. As a result, only a minority of farmers benefit from these operations and MSP.

Despite these limitations, empirical evidence suggests that a well-functioning procurement system positively impacts farmers’ returns. Districts with effective procurement operations witness paddy prices surpassing MSP by at least 4 per cent. This provides a viable avenue for farmers to sell their produce and enhances their bargaining power without public procurement.

In recent years, procurement activities have expanded both geographically and in quantity. Some states have surpassed their targeted procurement quantities, with Madhya Pradesh experiencing a significant increase in wheat procurement since 2007-08. Scholars argue that smallholders have benefited the most from these expanded operations, although a noticeable bias towards larger farmers persists nationally.

The ongoing farmers’ protests, centring around demands for a legal guarantee of Minimum Support Price (MSP), bring to the forefront the critical question: Is MSP the solution? While MSP has proven somewhat effective for crops included in the Public Distribution System (PDS) basket, its broader application poses challenges. The argument for a broad-based MSP and public procurement system is valid, but relying solely on MSP as the instrument to address agrarian distress is questionable.

More than merely announcing MSP, effective procurement operations are essential to bridge the gap between farmers’ expectations and actual realizations. The potential consequences of higher MSP without proportional procurement are significant price falls due to inelastic demand. To avoid such scenarios, the government must respond with increased procurement quantities, which, while providing temporary relief, burdens the exchequer and results in accumulated stocks that must be efficiently managed through market channels.

The challenges extend beyond procurement issues. Poor storage infrastructure, inadequate trading capabilities of state agencies, and the inability to dispose of surplus stock on time can lead to substantial losses. Therefore, whether procurement is done at MSP or not, there exists a risk of a lose-lose outcome in the long run. MSP, at best, offers temporary relief with limited reach in terms of crops, geographies, and the size class of farmers.

The ongoing farmers’ protests are symptomatic of a persistent agrarian crisis that has been overlooked for too long. Agriculture is becoming increasingly unviable, as evidenced by the declining share of income from cultivation in the total household income of agricultural households, coupled with a steady decrease in average landholding size. Despite early recognition of the importance of a minimum viable size of agricultural land, such goals have yet to materialize.

Lower productivity, higher production costs, poor infrastructure, and a significant portion of smallholders operating outside formal marketing arrangements further challenge the viability of Indian agriculture. Public investment in agriculture, including extension services and research and development, has declined, exacerbating the sector’s challenges.

Risk management in agriculture is another critical aspect that often needs to be discussed. Agricultural households face both idiosyncratic and covariate risks, including those arising from sources outside of agriculture. Climate change and globalization introduce production and price risks, and existing risk management instruments have proven largely ineffective. Moreover, credit availability from formal sources remains a concern, with rural credit adversely affected by branch closures and priority sector lending limit changes.

While MSP is a valuable measure to mitigate price risks, especially for certain crops, the current protests should prompt a broader discussion beyond its existence. The focus should shift towards comprehensively addressing farmers’ livelihood concerns. This involves creating opportunities for viable livelihood activities, enhancing the asset base of agricultural households, and building their capabilities to lead sustainable livelihoods.

Expanding the scope of MSP to cover a broader range of crops and regions is needed to resolve the existing imbalance in public procurement. This will encourage crop diversification, reduce dependency on specific states, and promote a more inclusive and resilient agricultural sector.

We must prioritize substantial agricultural infrastructure investments, including storage facilities and market capabilities, to efficiently manage surplus stocks. Moreover, this will enhance risk management mechanisms to address idiosyncratic and covariate risks faced by farmers, ensuring a more sustainable and competitive agricultural landscape.

To sum up, while farmers’ protests highlight the urgent need for reforms, resolving the uneven distribution of public procurement and MSP benefits is essential. A more inclusive and efficient system is crucial to ensuring the well-being of farmers across the country. The agrarian crisis demands a holistic approach beyond MSP, resolving the structural issues plaguing Indian agriculture and empowering farmers for long-term sustainability. The ongoing protests should be seen as an opportunity to embark on a mission to reshape the agricultural landscape and improve the lives of those dependent on it.

(Author: S N Tripathy is Former Professor of Economics, Gokhale Institute of Politics and Economics, Pune, currently at Berhampur, Odisha)