Context: 

• This article proposes a different way of designing a minimum support price (MSP).

Purpose of MSP 

• Price stabilisation in the food grains market 
• Income support to farmers
• Mechanism for coping with the indebtedness of farmers.

Evolution of current price stabilisation policy

• The price stabilisation policy for food grains in India evolved with the Essential Commodities Act in 1955 to counter price rise due to speculative private trading and then MSP in the 1960s. 
• A buffer stock policy with the public storage of food grains for market intervention was developed over time to involve different kinds of mechanisms such as: 
  • Setting cost-based minimum procurement price
  • Paying the difference between procurement price and market price 
  • Storing the procured surplus for sale through the Public Distribution System (PDS) at issue price, and 
  • Market intervention to stabilise price when deemed necessary. 

Outcomes of the policy

• Farmers shifted to a high-yielding varieties cropping pattern during the Green Revolution, while ensuring food security for citizens. 
• Interlinking procurement, storage and distribution with more centralised investment and control occurred.
• Partial MSP coverage skewed the cropping pattern against several coarse grains and millets particularly in rain-fed areas which remained a threat to our food security system.

How should MSP be redesigned?

• Price of the crop should be charged in a range according to harvest conditions, so that the total economic cost will vary within a price “band”.
  • Each crop within a band of maximum and a minimum price depending on harvest conditions (i.e. higher price in a bad and lower price in a good harvest year in general) will have its price set in the band. 
  • The price of some selected coarse grains can be fixed at the upper end of its band to encourage their production in rain fed areas. 
• Wide coverage of MSP through income support to farmers would generate massive positive economic externalities through raising industrial demand especially for the unorganised sector. 
• Agricultural debt can be addressed by the linking of selling of grains under MSP to provision of bank credit particularly for small farmers. 
  • The farmer can get a certificate selling grains at MSP which would be credit points proportional to the amount sold; this will entitle them to a bank loan as their right.
• MSP scheme’s effectiveness would depend largely on decentralising the implementing agencies under the constitutionally mandated supervision of panchayats.

What exactly can we expect from redesigning MSP?

• The objectives of income support to farmers, price stabilisation and food security and inducing more climate-friendly cropping patterns can be combined to an extent. 
• This will help in extending solidarity among farmers and non-farmers while creating a chain reaction of demand expansion through multipliers for the whole economy.
• Help addressing the indebtedness in the farming community

Reference:

1. https://www.thehindu.com/todays-paper/tp-opinion/an-msp-scheme-to-transform-indian-agriculture/article38410398.ece