Why A Wider MSP Net Is Required To Increase Overall Farm Income

On Monday, farmer leaders dismissed the government's minimum support price (MSP) proposal, saying that it wouldn't be advantageous for them. According to farmer leader Jagjit Singh Dallewal, "Following deliberations within our forums, it's evident that the government's proposal lacks substance. It doesn't serve the interests of farmers. Therefore, we unequivocally reject it." He said that farmers would go ahead with the Delhi Chalo march scheduled on February 21.

The development came a day after farmers’ unions put their protests on hold till February 21 after the government had reportedly made some headway in resolving the deadlock that led to a significant faceoff on the Punjab-Haryana border last week. A government delegation held a late-night meeting on Sunday with protesting farmers. 

The meeting was held in Chandigarh after which Union Minister Piyush Goyal proposed to buy pulses, maize, and cotton crops from the farmers in Punjab at the minimum support price (MSP) for the next five years. Representatives from the protesting farmers’ unions have requested two days to deliberate on the proposal within their forums, while a decision on their other demands is still pending.

MSP refers to a price fixed by the government to protect farmers against a steep fall in crop prices. It acts as a safety net and prevents losses. From an economic perspective, one of the larger concerns of farmers’ agitation is income from agriculture more than just MSP. “The average size of holdings for almost eight out of 10 farmers is less than two hectares. So that isn't going to yield you too much. And India's yield in cereals, paddy, and wheat, is way below what it should be given all the work that's happening in some of the institutes,” author and economist Shankar Aiyar told The Core.

Uninspiring Agricultural Income

According to the National Statistical Office's (NSO) Situation Assessment of Agricultural Households and Land and Livestock Holdings of Households in Rural India (SAS) 2019 survey, the average monthly income of agricultural households increased 59% to Rs 10,218 during the six years ending in 2018-19. The average monthly income of farmers' households in 2018-19 was Rs 8,337, per the SAS 2019 survey. Almost 90% of farmer households were categorised as landless, marginal, or small, meaning they owned less than 2 hectares (about 5 acres) of land. Their average monthly income in 2018-19 stood at Rs 9,700. On the other hand, medium-sized to large farms, constituting just 12% of farming households with over 2 and 10 hectares respectively, had an average monthly income of Rs 35,000. 

“The MSP theoretically provides a slow for the price. However, the MSP cannot improve your income profile unless your yield profile changes. Now, there are some states that have patched up vegetable horticulture to crop systems and dairy farming to the agricultural household. And that has improved their lot… India's agriculture is shackled by imperfect market conditions,” Aiyar said. 

In September 2020, India enacted three agriculture laws that led to widespread protests by farmers. For a year, hundreds of thousands of farmers, mainly from Punjab and Haryana, gathered around Delhi, and built camps along its borders demanding withdrawal of the laws. Protesters argued that these laws favoured large corporations, disadvantaging farmers in the process. They faced water cannons, tear gas, and brute force, and eventually, the police sealed Delhi's border with barbed wire and barricades. Farmers expressed concerns that these laws could result in the abolition of MSP for certain crops, leaving them vulnerable to the dominance of large corporations. After several rounds of discussions and widespread unrest, the government finally announced the repeal of the contentious laws in November 2021. 

In a resurgence of previous protests, thousands of farmers recently began marching towards New Delhi. This time, the primary demand of farmers' unions is to broaden the coverage of MSP to include all crops, to shield them from market fluctuations.

Wider MSP Ambit

According to a CRISIL study analysing 16 out of the 23 crops for which MSP is announced, the actual cost to the government for the marketing year 2023 is estimated to be Rs 21,000 crore. If the government chooses to procure only crops trading below the MSP in mandis during the current marketing season, it will need a working capital of approximately Rs 6 lakh crore, the analysis showed. The MSP benefit is not available throughout the country and there are about six states that see meaningful procurement. States like Punjab, Haryana, Telangana, Madhya Pradesh, Uttar Pradesh, and Chhattisgarh benefit from MSP. 

“For paddy, for example, the MSP is the guiding force when it comes to open market prices because the government is the largest buyer. Rice and wheat are distributed through the public distribution scheme. Now, if you come to another crop like maize, where the government is not procuring meaningful amounts. The poultry segment, which is a large consumer of maize crops as poultry feed, becomes a critical driver of demand,” said Pushan Sharma, director, of research, CRISIL Market Intelligence and Analytics told The Core.

The government procures largely two crops, paddy and wheat and that's influenced by the public distribution system. The government also intervenes in the procurement of a few other crops, if prices plummet or the farmers require support. But largely the bulk of the expenditure goes into paddy and wheat. Goyal, who met the farmers along with ministers Arjun Munda and Nityanand Rai, said government agencies will sign a contract with the farmers for the next five years for the proposed procurement and there will be no limit on the buying quantity.

Protesting farmers are also demanding that MSP procurement should be broad-based and not just for the two crops and MSP should be available in more states than just in the few where these crops are being procured. For instance, in Punjab and Haryana, most of the procurement happens in MSP while in Bihar, no procurement happens through MSP. “Another element is that they are requesting for the MSP to be set at 50% above the staple cost. And that will actually lead to an inch up in the current MSP itself,” Sharma said. 

In addition to a broader MSP, the farmers are also demanding a loan waiver, the execution of the Swaminathan Commission's recommendations, the provision of pensions for farmers and farm labourers, as well as the withdrawal of police cases filed against them during the protests. “What they (farmers) need is an open operating system of regulations, which allows the farmers singly or in a collective to go and negotiate, create backward and forward structures, see what they want to grow and what the market wants and grow accordingly. And they'll do the securitisation,” Aiyar said.