Cost to crop: What it will take for effective, transparent delivery of MSP

The central government last week formed a committee to improve the delivery of the Minimum Support Price (MSP) mechanism, find ways to make farmers grow in-demand crops and encourage them to adopt natural farming.

The committee comprising representatives of state governments, research universities, farmers’ groups and others was formed as part of the assurance Prime Minister Narendra Modi gave to protesting farmers when he repealed three contentious Acts in December 2021.

Some major farmers’ groups refused to join citing a variety of reasons that included pro-government groups being part of the committee, the chairman’s support for the Acts and the terms of reference not being what was promised to protesters. The MSP issue has been discussed in government circles multiple times and in multiple forms.

MSP’s effective and transparent delivery has been part of multiple committees and reports. Many recommendations have been implemented and others put in cold storage.

Making MSP effective has its own challenges and largely confined to few crops and geographies. State MSP procurement for crops other than wheat and rice has grown manifold, but it is small compared to cereals.

A NITI Aayog working paper said that public procurement is concentrated in cereals and done mostly by Punjab and Haryana, states battling water scarcity.

“It must be pointed out that one of the greatest incentives for farmers in Punjab, Haryana, and Western Uttar Pradesh, amongst others, is public procurement of cereals at minimum support prices (MSP),” the paper noted.

Madhya Pradesh (MP) acquires wheat on MSP and Telangana, Chhattisgarh, Odisha and Jharkhand fetch rice. In other words, assured procurement at MSP is an allurement that keeps farmers fixated on wheat and rice.

Weaning farmers away will require an adequate--and perhaps equal--assured return provided either through expanding the procurement basket or by creating avenues outside official channels.

A panel of experts constituted by the Supreme Court (SC) on the three now-repealed Acts recently in its report suggested ways to wean away Punjab and Haryana farmers from wheat and rice.

Also read: Govt forms panel to make MSP more transparent and effective after 8 months

It advocated a roadmap for diversification from paddy to sustainable high-value crops and funding through budgetary resources by the centre and state governments.

The SC-appointed committee recommended a cap on wheat and rice procurement to align it with the needs of the Public Distribution System (PDS) and leave procurement at MSP to the states. For PDS beneficiaries, it suggested giving them the option of either choosing cash or grains.

Many suggestions made by the SC-appointed committee could be termed ‘revolutionary’ in the current context and will require a strong political will to implement. After the farm laws controversy, it remains to be seen whether the Centre and states have any appetite for big-ticket agriculture reforms.

Another way to ensure MSP is deficiency price payment, which was tried as part of the ‘Bhawavantar Bhugtan Yojana’ of the Madhya Pradesh government a few years ago. Though the findings from that pilot were not encouraging, the model can be tried with tweaks.

MP's price deficiency pilot

The Madhya Pradesh model of Price Deficiency Payment or Bhawantar Bhugtan Yojana (BBY) compensated registered farmers for fall in prices below MSP. The payout was capped to a pre-fixed ‘model rate’, which was the average price prevailing in nearby mandis.

Farmers were required to give their land details, along with crop sown. The average yield of a certain number of years was taken as a benchmark for payments.

If the actual price realization was below the model rate, farmers got the difference between the MSP and model rate as compensation. If the difference was more than the model rate, the payment would be capped up to the actual difference.

The method of calculation was complicated and so was the process of registration. Despite several extensions, just around 45 per cent of the total area under eight crops in which the scheme was launched was registered in the kharif season of 2017. The maximum registrations were in case of soybean growers.

According to an ICRIER Working Paper in April 2018, out of the total 9.7 million hectares of area under the eight crops in which Bhawantar was applicable in MP in kharif 2017, just around 4.3 million hectares, or around 45 per cent, was registered under the scheme.

This also means that 55 per cent of the land was not even registered under the scheme and farmers in these were left out from the scheme’s ambit.

“It is clear that a large number of farmers did not register themselves on the portal and they therefore had to sell their produce at prices which were lower than that of the announced MSPs,” said the paper titled ‘Supporting Indian Farmers: Price Support or Direct Income/Investment Support?’ and written by eminent agriculture economist Ashok Gulati along with Tirtha Chatterjee and former agriculture secretary Siraj Hussain.

This also meant that despite a sharp fall in prices of most kharif crops in 2017, a limited number of farmers actually benefited from Bhawantar.

The average selling price of urad from October to December was almost 42 per cent lower than the MSP, but only 32 per cent of the total urad produced in Madhya Pradesh was compensated.

In the case of soybeans, the difference between the MSP and average selling price was 12 per cent but less than 19 per cent was compensated.

If low and inadequate participation was one part of the problem, a bigger pertinent one was the sharp drop in prices once the sale window under Bhawantar opened.

Farmers and traders allegedly connived to artificially keep prices down and widen the differential between actual price and MSP so that they could share the payout.

An investigative report by news website scroll.in published in June 2018 and based on RTI responses said that MP farmers lost almost Rs 200 crore due to manipulation in the scheme. The ICRIER Working Paper estimated the losses to be much more due to suppression of market price.

However, many experts countered the claims on the grounds that the arrival of soybean and urad increased post-harvest months pulled down prices in MP and the fall in prices wasn’t restricted to the state alone.

Crop diversification

The Centre and states have tried encouraging farmers in water-stressed Punjab, Haryana and western UP to diversify from wheat and rice to crops like pulses, oilseeds and maize.

However, so far, the efforts have been largely on the margins and any large-scale diversion through higher relative MSP in oilseeds and pulses than cereals has not materialized.

Evidence shows that though both acreage and production of pulses and oilseeds have seen a significant increase in the last few years, it has not come at the cost of rice and wheat.

Between 2014-15 and 2020-21 (July to June), when MSP of paddy (common) was increased by almost 37 per cent, acreage under the crop dipped by just around 2.5 per cent.

In the case of wheat, while the MSP increased by 36.2 per cent during the same time frame, there was a 10 per cent increase in the area under cultivation.

For chana in contrast, between 2014-15 and 2020-21, while the MSP increased by almost 61 per cent, the area under the crop rose by almost 36 per cent.

In the case of soybeans, while the MSP increased by almost 51.5 per cent between 2014-15 to 2020-21, the area under the crop rose by nearly 10 per cent.

This clearly shows that while the MSP increases might have encouraged farmers to grow more pulses and oilseeds but it has not exactly weaned farmers away from paddy and wheat.

MSPs in isolation unless backed by strong procurement mechanisms or ready markets are not enough to encourage farmers to leave cereal cultivation and opt for pulses and oilseeds.

A case in point is the growth seen in India’s pulses production in the last few years.

Several experts believe that India’s pulses production have risen from a mere 14-15 million tonnes to almost 22-23 million tonnes in the last few years, lowering the country’s import dependency not just due to higher MSPs but also because of an assured procurement system by state agencies, who need to fill the government’s requirement to maintain 2 million tonnes of the annual buffer.

MSP now covers more farmers

A data from the Commission for Agriculture Costs and Prices (CACP), which is a main rate-setting panel for the government shows that while in Punjab and Haryana roughly around 0.8 to 0.9 million farmers have benefitted from MSP in case of wheat in 2020-21 season, it is in states such as MP and UP from where the procurement has risen exponentially.

In MP, around 0.53 million farmers benefited from wheat MSP in the 2016-17 rabi marketing season which rose exponentially to 1.6 million farmers in 2020-21 season, a rise of over 33 per cent in a span of five years.

Similarly, in UP too, procurement has risen manifold in the last five years. The number of farmers who have got MSP for wheat because of enhanced procurement has grown from 0.16 million to over 1.07 million.

A similar trend has been in rice procurement as well over the years.

A report in the 'Indian Express' published some months back shows that around 15-25 per cent of farmers benefit from the MSP mechanism, including those who grow cotton and milk farmers who supply at a predetermined rate to dairies and cooperatives.

In light of all these factors, how far and how much will the fresh committee on MSP with a fresh outlook on MSPs remain to be seen.