Legal Guarantee of MSP and Procurement: Need of the Hour   

  • November 25, 2021

In the present situation, it is crucial to legalize Minimum Support Price (MSP) and increase its spread to all farmers and all the crops. The MSP along with effective procurement can give fillip to crop diversification and sustainable agriculture, writes Sukhpal Singh, MK Sekhon and Sumit Bhardwaj.


Although the three farm laws are repealed, farmers have been demanding legalization of Minimum Support Price (MSP) for all crops. There are divergent views on the issue of legalization of MSP for all the crops. In the meeting with protesting farmers, the union government claimed that it is not possible to extend MSP for all crops as a huge amount of Rs.17 lakh crore is required for purchasing all crops in all the states. In this context, we have undertaken a study to examine the various dimensions of the MSP system along with funds requirements and crop-wise marketed surplus in the country.


We know that MSP is an integral part of farm sustainability. The concept of MSP as an institutional mechanism was conceptualized during the pre-green revolution period. In this process, the Agricultural Price Commission was set up during 1965, based on Jha committee recommendations to suggest support price for crops after considering the cost of cultivation to account with politico-economic objectives through ensuring remunerative prices to farmers and reasonable prices to consumers. The new farm technologies, institutional set-up and policy support helped in enhancing the food production in the country. Price incentives through support prices and procuring food grains for distribution through PDS and maintaining buffer stock were the key factors for bridging the demand supply gap of food grains in the country. Under this mechanism, the MSP is being announced for 23 crops, out of which are 7 cereals (paddy, wheat, maize, sorghum, pearl millet, barley and ragi), 5 pulses (gram, tur, moong, urad and lentil), 7 oilseeds (groundnut, soyabean, rapeseed-mustard, seasamum, niger seed, sunflower and safflower), and 4 commercial crops (cotton, copra, raw jute and sugarcane). Although MSP is declared for 23 crops, most of these crops lack effective procurement to actualize MSP into a reality for farmers. The farmers are demanding effective procurement at MSP for all the farm produce.


1. Procurement of 23 crops


The MSP announced by the union government for 23 crops is inadequate as procurement for all crops and for whole quantities is not effective. Only 6 percent of agricultural produce across the country is procured at MSP. The agricultural markets are dominated by private traders through whom about 60 percent of paddy and about 36 percent of wheat is sold. The rest of the farmers face stiff price competition and receive meager prices. Therefore, for the overall sustainability of farming it becomes more crucial to strengthen MSP and increase its out spread for all farmers and for all crops. The remunerative prices and effective procurement systems are indispensable for farmers’ livelihood, and overall growth of the economy. One fails to understand what is the logic of announcing MSP of 23 crops, if effective procurement is absent in the market.


The cost of production, as suggested by Jha committee was the foundations for the calculation of MSP. There are mainly six concepts for calculating costs such as A1, A2, B1, B2, C1 and C2. The fixation of MSP should be based on Ramesh Chand Committee (RCC) formula at Cost C2 (which is final cost) + 50 percent margin (as per Swaminathan Report). After the Swaminathan report (2005), Ramesh Chand Committee (2015) suggested some additional cost aspects that needed to be included in cost C2. The main additions are (i) Head of the farm household should be considered as skilled workers rather than a manual worker as is prevalent. (ii) Interest on working capital should be considered as skilled work against prevalent manual labour. (iii) Actual land rent without any capping. (iv) Including post-harvest costs like cleaning, grading, drying, packaging, marketing and transportation costs. Therefore, cost C2 should be fixed as per formula given by RCC and margins of 50 per cent should be given to the farmers. In such a situation, a legalization of MSP for all the 23 crops for which MSP is declared should be immediately done by the union government. It is imperative to mention here that the MSP should be given as per formula C2 (as per Ramesh Chand Committee) plus 50 percent margin. This law should formulate that any purchase below MSP should be an offence. The MSP for all the crops should be used as the ‘floor price’ for bidding auctions in the market for all private purchase. Moreover, the farmers should be able to get compensation if this legal right does not accrue to them in the marketplace.


Requirement of Funds

Cost benefit analysis for procuring the whole surplus of crops was calculated. The value of total production for all the crops grown in the country at MSP was worked out to be Rs. 9.95 lakh crore during 2018-19. Out of this production almost half share goes to the wheat and paddy crops only. However, all of the production is not marketable. Farmers retain part of it for self-consumption, seed for next sowing and for feed to animals. The market surplus ratio ranges between 49 per cent for Ragi to 100 percent for copra, sunflower and safflower. It is about 74 per cent for wheat and 84 percent for paddy. In such a way, the total value of market arrival comes out to be Rs. 8.47 lakh crore, however, the value of this marketed surplus at the wholesale price is almost equal to this amount.


Table 1: Value of India’s total agricultural production and market arrivals at MSP, 2018-19

Source: *Agricultural statistics at a glance, 2019 ** # procured during 2016-17

It needs to be highlighted here that procurement agencies don’t have to buy every single grain that comes to market. Procuring and mopping up even one-third of the market arrivals is usually enough to lift the prices and stable market situation. This happened in the case of the cotton crop for many years. The crops procured by the government agencies will not be thrown in the ocean, but can also be sold in the market in addition to being absorbed in various food security schemes. The sale of wheat and paddy at subsidised rate for PDS under National Food Security Act is the prime responsibility of the welfare state. It is clear that the operational procurement costs of the government are higher than this cost, which should be about 15 per cent at around Rs 9.74 lakh crores (these costs are higher due to operational inefficiencies, corruption and poor storage/transportation system). These costs can be reduced with monitoring and effective management.


Table 2: Actual funds requirements for procurement of crops: Season-wise


There are two main marketing seasons along with two sub-seasons in the agricultural marketing of the country. The funds for the procurement of crops are not required in a single go. In Rabi seasons, a sum of Rs 3.26 lakh crore is required for the purchase of all the crops. At an investment of Rs 3.26 lakh crore, most of which can also be recovered through subsequent sale and disposal of procured produce (other than the produce that goes into food security schemes which entail a further food subsidy bill for the government), the government can make MSP a reality for most farmers (including the ones from which it does not directly procure), by simply being an influential player in the market through its procurement operations. Further, the whole amount for procurement is not required at a time, if smart disposal operations are taken up, this can become a revolving fund with cash flows managed from kharif to rabi, and rabi to kharif.


2. Procurement of Horticultural and Livestock Product


Another issue is related to the farm produce which is uncovered under 23 crops. These crops are mainly horticultural crops (fruits/vegetables) and livestock products (milk, egg, fish, meat etc.) and forestry. The horticulture crops and livestock products together cover around 45 percent share in the gross value of output of agriculture, forestry and fishing sectors of the country.


For this purpose, an empowered joint committee should be set up with its constitution, terms of references and methodologies as mutually agreed upon by both parties (farmers and government), for all other remaining agricultural commodities, especially perishables like horticulture products, milk, fish and meat. It is pertinent to say that the government should commit to be bound by the recommendation of the committee in toto.

The Government must take into account that the farm sector provides vast employment to our economy, which gives a boost to all other activities in the economy.


3. Debt and MSP


Indebtedness is claimed to be an important indicator of farmers distress as the incidence of debt may be a direct outcome of the non-viability and low income of the farming. As per NSSO (2015) the extent of debt of agricultural households was the highest in Punjab, followed by Haryana and Tamil Nadu. The most common reason for farm debt was claimed as low income of farmers which mainly depends upon yield and prices of the crops. Therefore, the price realization may be the root cause of this situation. If farmers were paid as per the recommendations of Swaminathan Commission (C2+50%) from 2005-2020, on an average Indian farm household would have got Rs 1.66 lakh. This amount is less than their total debt burden of Rs 73020 (2012-13). Under this scenario, the demand for debt waiver of the farmers becomes a logical proposition. As a result, the farmers have low earnings, and they are under debt and economic distress. As per NABARD report (2016-17), the monthly income of the farm family of the country is just Rs 8931. Around 4 lakh farmers committed suicide during the last 15 years and every day around 2500 farmers have been quitting agriculture as cultivators in the country.


In such a situation, it becomes crucial to legalize MSP and increase its spread to all farmers and all the crops. The MSP along with effective procurement can give fillip to crop diversification and sustainable agriculture.


The authors are from the Department of Economics & Sociology, PAU Ludhiana.  


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    By: Dr Prithvi Raj Gulati on November 27, 2021

    MSP is the only way to increase not only the living standard of farmers and landless labour but increase GDP growth rate of the country as more consumption will give rise to more employment which in turn will again result in more consumption and more employment.Hence an auspicious cycle of consumption employment and growth will continue

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