Why in news?
The union government recently has announced a hike in the Minimum Support Price (MSP) for wheat.
What is MSP?
- Minimum Support Price is the price at which government purchases crops from the farmers.
- Commission for Agricultural Costs and Prices (CACP) recommends Government of India to fix MSP before sowing season.
- The objective of the MSP is to ensure remunerative prices to the growers, by encouraging higher investment and production.
- At present, the MSP covers 24 crops, which includes cereals, pulses, oilseeds, copra, raw cotton, raw jute and tobacco.
What are recent hikes about?
- Union government has hiked the MSP to 6.8%, which is slightly higher of compared with a 6.6% increase in FY17.
- In aggregate, the weighted average increase for winter crops of an estimated 7.4% is slightly lower than the hike of 8.5% for FY17.
- While the government has implemented modest hikes just 4% between FY14 and FY16 this year.
- The combined hike is slightly higher, at 6.6% compared with 6.4% in FY17.
What are practical difficulties with MSP?
- Despite the 12% hike in the MSP of five pulses in 2016-17, the 40% rise in output, primarily, ensured prices were not just below the MSP in most mandis.
- Price fell 8% and profit margins contracted 16%, the fall in profits was as much as 30%.
- The government did procure a record 1.6 million tonnes of pulses, but this was too small to make a difference farmers moved away from the crop and sowing fell by close to 4% this year.
- A mere 5-6% of farmers benefit from MSPs and, equally important, the costs of the system are getting oppressive.
- More than half of the big jump in the country’s wheat production in the five years to 2013 was due to extra output in Madhya Pradesh (MP).
- It was driven by MSPs and bonuses provided by the state.
- Farmers, across MP, devoted more acreage to wheat, reinvesting the increased earnings in improving productivity.
What alternative mechanisms can be followed?
- In the past, there was no other option to MSPs and FCI to deliver rations, now with Aadhaar the government can move to targeted cash payments.
- Using Aadhaar-based bank transfers government can save Rs 38,000 crore every year.
- In which case, farmers could also be given cash transfers per acre of holdings and this, in turn, would make them more attuned to the market.
- Greater market access for farmers not just locally but also to markets overseas is also a better way to ensure they get a higher price for their produce.
- Easing rules to ensure organised retailers can purchase from the farm-gate will give farmers better realisations, and FDI in multi-brand retail is critical here.
- Extending the futures and options market to agricultural crops too would facilitate better price discovery.
Way forward
- The concept of Minimum Support Price is fading, but Union government is unwilling to find new possibilities.
- MSPs make no sense unless there is significant procurement, but with FCI so inefficient, that drives up costs significantly.
- The Costs of MSP-FCI system now prohibitive, thus union government must try better alternatives.
Source: Financial express