Issues with MSP hikes

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