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Economy 19-Feb, 2024

Decoding the Financial Implications of Farmers’ Demands: Legal MSP

By: Damini Mehta

Decoding the Financial Implications of Farmers’ Demands: Legal MSP

Source: Getty Images

Realizing farmers’ demands to provide MSP for all crops presents multiple challenges, both procedural and financial. According to some estimates, guaranteed MSP for all crops will create an additional annual expenditure approximating Rs 10 lakh crore.

After protesting on Delhi’s borders for nearly two years in 2020-21 amidst the COVID-19 pandemic, farmers from states of Punjab, Haryana and Uttar Pradesh walked back home as the Union government promised to withdraw the three farm laws and agreed to look into their other demands. The other demands ranged from legal guarantee of Minimum Support Price (MSP) for all crops, doubling farmers income as promised by the Modi government to 50% profit over their total cost of production. In December 2021, the union government repealed the three farm laws and announced the setting up of a committee composed of farmer representatives and the union government to look into the other demands. In June 2022, the Union government set up a committee to look into the demands of the farmers to provide MSP for all crops but according to the protesting farmers the process has been slow and has barely yielded results. 

Now the protesting farmers are back on roads accusing the government of backing out on the other promises. They are demanding a law to ensure legal guarantee for Minimum Support Price (MSP) on all crops, Rs. 10,000 old age pension support to farmers above 60 years of age, and withdrawal of cases registered against farmers during the previous farm law agitation. The other demands range from complete loan waiver for all farmers, setting up MSP based on the Swaminathan Commission's formula, increasing daily wages under MGNREGA to Rs. 700 a day for 200 days of guaranteed employment a year, against the present 100 days.

On 12th February 2024, two days prior to the Farmers’ march to Delhi, the union government sent a delegation of Union ministers including Piyush Goyal, Arjun Munda, and Nityananda Rai to negotiate with the protesting farmers. The delegation is currently in the fifth round of talks so far but no viable conclusion has been reached. According to the government, farmer representatives are adding on to the demands initially made which is leading to a failure of the talks and says it is ready to accept 10 of the 13 demands by the various farmer unions. In the fifth round, the government has proposed providing MSP for three more crops - cotton, pulses and maize to be procured through cooperative societies. We take a look at the various demands of the farmers and its viability financially as well as otherwise.

Status Quo: MSP Policy for 23 Crops

Currently, the Union government declares MSP for 23 crops every year. Of this there are seven kinds of cereal such as paddy, wheat and maize, five types of pulses, seven oilseeds, and four commercial crops (sugarcane, cotton, copra and jute). MSP for these crops is based on a policy and it is not a legal guarantee and of the 23 crops for which MSP is declared, the union government directly procures only wheat and rice at the MSP. In the case of sugarcane, MSP works in the form of a Fair and Remunerative Price (FRP) and the State Advised Price (SAP). While MSP is meant to provide a safety net to farmers to ensure fair price on their produce, the government is not obliged to procure all the crops or force private players to purchase crops at the declared MSP. In this case farmers are often forced to sell their [produce in the open market often at rates lower than the MSP.

The concept of a minimum support price or guaranteed price on farmer produce originated owing to the need to provide a certain share of profit above the costs to the farmers as an assured source of income. However, given it is a policy and not a law, it is not enforceable in the court of law. Moreover, public procurement of wheat and rice at MSP has led to excessive production of these crops in states such as Punjab and Haryana. Several farmers have shifted to cultivation of wheat and rice irrespective of the nature of soil and weather conditions primarily due to the assured MSP and public procurement component for both these crops. On one hand, it has created an adverse impact on soil heath and water and overuse of pesticides and fertilizers and on the other, led to reduced cultivation of other crops such as pulses and oil seeds. 

Across India, sugarcane is the only crop for which MSP is legally enforceable through the central scheme. Sugarcane MSP works differently from the MSP provided for wheat and rice. Under the  Essential Commodity Act, sugar mills are required by law to procure cane from the farmers at a FRP or SAP. In several states such as Uttar Pradesh enforcement of SAP for sugarcane has led to pending dues running into crores and closure of mills due to excessive debt burden. In light of this and other issues with MSP, the Shanta Kumar Committee, in 2015, recommended a revision in the MSP policy and a provision for better price support for pulses and oilseeds. 

Alternatives to Legal MSP: PDP in Haryana & MP 

Apart from legalizing MSP or fixing a price at which a particular crop can be sold in the market, government procurement of farm produce has emerged as a major challenge. The current system of public procurement of wheat and rice is functionally operational in only a few states of Northern India, i.e. Punjab and Haryana and some parts of western UP. However, there are other ways in which legal MSP can be provided without government procurement. Such a system is already in place in Haryana and Madhya Pradesh (MP) in the form of price deficiency payments (PDP). Under a PDP system, instead of physically procuring a crop, the government is obligated to pay farmers the difference between the market price and MSP, if the former is lower. The payment is on the basis of the quantity of crop sold to the private traders instead of the actual yield. In Madhya Pradesh PDP operates under the Bhavantar Bhugtan Yojana (BBY). Under BBY, the price difference between the market price (ascertained from an average of APMC prices) and the MSP is paid on the actual quantity sold by the farmer. 

Haryana’s PDP scheme, called Bhavantar Bharpai Yojana (BBY), is limited to bajra, mustard, and sunflower seed but also covers groundnut, chana (chickpea), moong, and 16 vegetable and 3 fruit crops. Haryana’s BBY has a procurement component and a PDP component depending on the price difference between MSP and market price. Both the states have set an example to provide legal MSP in the form of PDP for some crops. However, operability of the scheme in these states is dependent on the existence of a well set up APMC mandi infrastructure and digital farmer registration. 

Legal MSP Across the Board: Is it Possible?

Realizing farmers’ demands to provide MSP for all crops presents multiple challenges, both procedural and financial. According to some estimates, guaranteed MSP for all crops will create an additional annual expenditure approximating Rs 10 lakh crore. This sits nearly equivalent to the budget assigned for infrastructure in the interim budget 2025. Apart from the financial cost of providing MSP, other issues such as procurement and storage of perishable crops such as vegetables and fruits, public procurement through overburdened and ill functioning Agriculture Produce Market Committees (APMCs) and crowding out of produce availability for the private sector would be some of the challenges that make legal MSP for all crops untenable.

Economists have also raised a concern on the government-fixed MSPs on the lines that they distort open market operations. According to them, a market demand driven farming will yield better returns for the farmers and ensure adequate crop diversification as well. Instead of MSP they suggest income support such as the PM Kisan Samman Nidhi Yojana (KISAN) as a more efficient tool to support farm incomes. The PM Kisan Yojana identifies beneficiaries on the basis of a farming family with nearly 11.3 crore farmers covered under the Scheme in April-July 2022-23 payment cycle.

Another way to ascertain beneficiaries and distribute income support can be in the form of per acre allocation as is done in the case of Telangana government's Rythu Bandhu Scheme. Direct income support provides assured income to farmers on a regular basis, supports acquisition of inputs for farmers and other household expenses and does not distort the market system. It is immune to the type of crop and will therefore cover all farmers. A per acreage basis support will be more efficient as it will provide financial support commensurate to cost of production to an extent. 

In the next piece, we take a look at the other demands raised by the protesting farmers, such as increased MGNREGA coverage and waiver of all farm loans. 

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