explained-what-is-the-basis-of-msp-how-is-it-fixed-and-how-binding-is-it

 

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Context: The Cabinet Committee on Economic Affairs (CCEA) chaired by the Prime Minister has approved the increase in the Minimum Support Prices (MSPs) for all mandated Rabi crops for marketing season 2021-22.

More about news

  • The wheat MSP for the rabi crop of 2020-21 has been fixed at Rs 1,975 per quintal—2.6 per cent higher than Rs 1,925 in 2019-20. It is the lowest increase in 11 years.
  • The increase in MSP for Rabi Crops for marketing season 2021-22 is in line with the principle of fixing the MSPs at a level of at least 1.5 times of the All-India weighted average Cost of Production as announced in Union Budget 2018-19.
  • This increase in MSP is in line with the recommendations of Swaminathan Commission.

What is MSP?

  • Minimum Support Price is the price at which the government purchases crops from the farmers, whatever may be the price for the crops. Minimum Support Price is an important part of India’s agricultural price policy.
  • The Centre currently fixes MSPs for 23 farm commodities — 
    • 7 cereals (paddy, wheat, maize, bajra, jowar, ragi and barley), 
    • 5 pulses (chana, arhar/tur, urad, moong and masur), 
    • 7 oilseeds (rapeseed-mustard, groundnut, soyabean, sunflower, sesamum, safflower and nigerseed) and 
    • 4 commercial crops (cotton, sugarcane, copra and raw jute) — based on the CACP’s recommendations.

Need of MSP:

  • MSP helps to procure adequate food grains through Food Corporation of India (FCI), state agencies and cooperatives. 
    • The PDS network through the policy of issue price delivers it to the weaker sections.
  • Remunerative prices to the growers: The minimum support prices are a guaranteed price for farmers’ produce from the Government. 
    • Minimum prices ensured for the crops hedge farmers from market fluctuations.

Issues with MSP

  • Only 6?rmers benefit from MSP: The Shanta Kumar-headed High Level Committee on Restructuring of Food Corporation of India (FCI) had noted that only 5.21 million of the country’s total estimated 90.20 million agricultural households in 2012-13 had sold paddy and wheat to any government procurement agency.
    • It meant that only 6% of Indian farmers benefit from minimum support prices (MSP). 
  • Issues behind calculating MSP
  • The C2 component = 35-40% higher than A2+FL.
  • Calculating the MSPs based on cost of input components ignores the demand-supply rule for determining the cost.
  • MSP not a right: The government declares MSPs for crops, but there’s no law mandating their implementation. Farmers cannot demand it as a matter of right. 
    • The government buys wheat and paddy at their MSPs to supply the PDS’s foodgrain requirements.
    • The National Food Security Act, 2013 (NFSA) provides a legal basis only for the public distribution system (PDS) that earlier operated only as a regular government scheme. 
    • The CACP, in its price policy report for the 2018-19 kharif marketing season, had suggested enactment of a legislation conferring on farmers ‘The Right to Sell at MSP’. But the proposal was not accepted.
  • Legal backing only for sugarcane price: Its pricing is governed by the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act which provides for the fixation of a ‘fair and remunerative price’ (FRP) for cane during every sugar year (October-September). 
    • Sugar mills are legally obliged to pay the Centre’s fair and remunerative price (FRP) within 14 days of purchase. 
    • But even the FRP is payable not by the government
  • An unwarranted fascination with MSPs in India: The last Agriculture Census (2015-16) showed that 86% of all land holdings were small and marginal (less than 2 hectares). 
    • These are such small plots that most farmers dependent on them are net buyers of food. 
    • When MSPs are raised they tend to hurt the farmers the most.
    • Data that shows more and more farm produce is being sold to private players — instead of the government via MSPs — already.
  • The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020 does not give any statutory backing to MSP.
    • If APMCs were to turn unviable due to the trades moving outside, there will be a question mark over government agencies procurement that now takes place in mandis.

Issues with the Shanta Kumar  Panel report

  • Many crops excluded: The Shanta Kumar panel looked only at paddy (un-milled rice) and wheat. Much of public procurement is limited to these two cereals.
  • The Food Ministry’s data shows that 11.06 million paddy and 4.06 million wheat farmers benefited from MSP procurement in 2019-20. 
    • The 2015-16 Agriculture Census puts the total number of operational holdings at 146.45 million
    • That means that between 15% and 25% avail MSP.
  • Significant procurement of other crops relative to their estimated production. The ratios are from 29.5 per cent to over 43 per cent for paddy/rice, wheat and cotton, 18-19% in chana and arhar/tur, 10% in milk, and 7-9% in mustard and groundnut.
  • Milk procurement by dairy cooperatives, which are largely quasi-government organisations. 
    • They pay assured prices to farmers even if not technically MSP. 
    • National Dairy Development Board’s (NDDB) 2018-19 Annual Report has placed the total producer-members of dairy cooperatives at 16.93 million.
    • The presence of cooperatives ensures that private dairies pay closer to the formers’ rates.
  • Sugarcane is another crop not procured by government agencies but cane prices are fixed by the government.
    • They buy roughly 80% of the total crop produced. 
  • Cotton: The NSSO report has estimated the total cotton-growing households at 7.55 million and that of sugarcane at 6.2 million. 
    • Up to 10 million of them may have availed of either MSP or FRP. 

Therefore saying that only 6% of farmers get MSP is clearly an underestimate.The government should assure the farmers that nothing in the Farmers' Produce Bill shall stop the government from announcing MSPs and undertaking crop purchases at these rates as before. 

Commission for Agricultural Costs and Prices 

  • It is a decentralised agency of the Government of India. 
  • It is an attached office of the Ministry of Agriculture & Farmers Welfare, Government of India.
  • The CACP is a statutory body and submits separate reports recommending MSPs for Kharif and Rabi seasons.

Factors in calculation: 

  1. Cost of production
  2. Changes in input prices
  3. Input-output price parity
  4. Trends in market prices
  5. Demand and supply
  6. Inter-crop price parity
  7. Effect on industrial cost structure
  8. Effect on cost of living
  9. Effect on the general price level
  10. International price situation
  11. Parity between prices paid and prices received by the farmers.
  12. Effect on issue prices and implications for subsidy

How is MSP calculated?

According to the formula prescribed by the Swaminathan Committee, there are three variables that determine production cost:

  • A2- A2 includes out-of-pocket expenses borne by farmers, such as term loans for machinery, fertilisers, fuel, irrigation, cost of hired labour and leasing land.
  • A2+FL- A2 + unpaid family labour.
  • C2 - Rental + interest on owned land / fixed capital assets other than A2 +FL.

Although the National Commission on Farmers (NCF) headed by MS Swaminathan opted for the 3rd method plus 50% margin to calculate MSP, presently MSP is decided on the basis of the formula of A2+FL. 

The Comprehensive Cost (C2) is more reflective of the actual cost of production since it takes into account rent and interest forgone on owned land and machinery, over and above the A2+FL rate. 

The ideal formula according to the Committee would be MSP = C2+ 50% of C2. 

M.S Swaminathan headed National Commission on Farmers recommended a 50% margin over C2, which is also being the demand of the farmers.

  • Government increased the MSPs of 22 Kharif and rabi crops to a minimum of 50% returns over (A2 + FL).
  • MSPs given by the government is less than cost C2.

 

After reading this article, answer the following question for Mains answer writing practice. Also you can get your answer checked free of cost by clicking on the following link.

For Mains:https://www.jatinverma.org/home/typepost/dailymainsanswerwriting

Q) Towards the aim to increase the income of farmers and making agriculture remunerative, Minimum Support Price (MSP) has been a cornerstone of the agricultural policy since 1965. Critically examine the MSP policy and suggest a way forward for addressing various related issues.

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