Protesting farmers want MSP law: How would such a guarantee work?

Such market conditions, favouring buyers over sellers, also mean farmers are price takers, not price makers. Lacking the market power to influence the prices of their produce — or to even set the MRP (maximum retail price), as firms in most industries do — they sell at prevailing supply-and-demand-determined rates. Worse, while their crops are sold wholesale, they pay retail prices for everything from seeds, pesticides, diesel, and tractors to cement, medicines, toothpaste, and soap.

Not for nothing do farmers from time to time demand minimum support prices (MSP) for their crops. As the Lok Sabha elections approach, there could be a clamour for parties to include “legal guarantee for MSP” in their manifestos.

Price versus income support

Most economists, though, are opposed to government-fixed MSPs based on cost-plus pricing, sans any consideration to market demand. Farmers, they say, should plant what the market wants, as reflected in the prices for various crops at a given point in time. Cost-plus MSPs that are oblivious to demand conditions will distort farmers’ production decisions, resulting in the oversupply of some crops and an undersupply of others.

Economists largely believe that it is better to give farmers “income”, instead of “price”, support. That would mean transferring a fixed sum of money annually into their bank accounts, whether on a per-farmer (as in the Centre’s PM-Kisan Samman Nidhi) or per-acre (the Telangana government’s Rythu Bandhu) basis. Direct income support schemes aren’t market-distorting and benefit all farmers, irrespective of which crop they grow in whatever quantity, and sell to whomsoever at any price.

However, the flip side to everyone being paid the same money is: where does this leave the real producing farmer, who invests more resources, time, and effort in the field?

These farmers, unlike those for whom agriculture is a secondary or incidental livelihood source, may be justified in seeking some kind of price assurance for the crop they are sowing now and harvesting a few months down the line.

And given that they, more than other businessmen, are exposed to both price and production risks (from weather, pests, and diseases), MSP guarantee is probably not an unreasonable demand.

Moreover, price support can be a useful tool for promoting crop diversification. Farmers are more likely to grow pulses, millets, and other nutrient-dense, less water-intensive crops than rice, wheat, or sugarcane if they are assured of MSP on the former. So long as MSPs do not deviate excessively from market rates and inter-crop price parity, it’s the next question that deserves answering.

How can MSP be guaranteed?

There are two conventional ways.

The first is to force buyers to pay MSP. Sugar mills are required, by law, to pay cane growers a “fair and remunerative” or “state advised” price within 14 days of purchase. But this approach risks implementation hurdles (recurrent cane payment arrears are proof), or worse, the private trade choosing to not buy at all. The second is for government agencies to buy the entire marketable produce of farmers offered at MSP. That is unsustainable, both physically and fiscally.

But there’s a third option: price deficiency payments (PDP). It entails the government not physically purchasing or stocking any crop, and simply paying farmers the difference between the market price and MSP, if the former is lower. Such payment would be on the quantity of crop they sell to the private trade.

PDP was tried out first in Madhya Pradesh through a Bhavantar Bhugtan Yojana.

Under this scheme, the market price for a crop was its average modal (most-quoted) rate in the Agricultural Produce Market Committee (APMC) mandis of Madhya Pradesh as well as two other growing states during the particular month of sale.

The price difference vis-à-vis the MSP was payable on the actual quantity sold by the farmer, backed by an “anubandh patra” (sale agreement with trader), “tol parchi” (weighment slip), and “bhugtan patra” (payment letter signed by both parties).

The Madhya Pradesh scheme was implemented during the 2017-18 kharif (post-monsoon) season for eight crops: urad (black gram), soyabean, maize, arhar (pigeon pea), moong (green gram), groundnut, sesame, and nigerseed. But despite 21 lakh-odd farmers registering and payments of about Rs 1,952 crore being made, the scheme couldn’t be continued for lack of Central support.

A model in Haryana

Haryana’s PDP scheme, called Bhavantar Bharpai Yojana (BBY), is being implemented mainly in bajra (pearl millet), mustard, and sunflower seed, although technically is also covers groundnut, chana (chickpea), moong, and 16 vegetable and 3 fruit crops.

BBY operates on the Haryana government’s ‘Meri Fasal, Mera Byaura’ portal, in which farmers have to register themselves along with details of their land (village name, khasra plot number, holding size, etc) and area sown under different crops.

The registration for kharif crops is open from June to August, and that for the rabi (winter-spring) crop from November-February. On grant of registration, post “girdwari” (crop area verification) by revenue/ agriculture department officials and satellite imaging, the farmer is eligible to obtain MSP via BBY.

Haryana has opted for a mix of both physical procurement and PDP under BBY. In 2020-21, the state government directly procured 776,909 tonnes of bajra and 16,952 tonnes of sunflower at MSPs of Rs 2,150 and Rs 5,885 per quintal respectively.

In subsequent years, Haryana has undertaken both (see table), depending on the gap between the MSP and market price. “If the difference isn’t too large, we do procurement to push up the market price closer to MSP and cover the rest through PDP. If it is too high, then we only do PDP,” an official said.

The PDP itself has tended to be on a fixed rate — Rs 450/ quintal for bajra and Rs 1,000/ quintal for sunflower in the 2022-23 marketing year — derived from average quotes at the National Commodity and Derivatives Exchange. Also, farmers are being paid not on actual production, but the three-year average yield for their block/ sub-district with lower and upper caps.

So what is the road ahead?

Both Madhya Pradesh and Haryana have demonstrated the feasibility of delivering MSP to farmers at least in some crops other than rice, wheat, and sugarcane.

One reason they have been able to do this is because of the already-created APMC mandi infrastructure and systems for farmer registration in these states. This makes it possible to record each transaction — what quantity of any crop a farmer has sold at a certain price — and to pay the difference vis-à-vis the MSP based on that.

If a nationwide PDP scheme with 50% Central funding were to be implemented, it can perhaps incentivise other states to follow the examples of Madhya Pradesh and Haryana. They could, for a start, build the market infrastructure and systems that would ultimately enable even their farmers to get MSP, whether by law or otherwise.

This explainer was first published on January 8. For more on the protest, click here.