10/01/2020 - Government Policies

KEY POINTS

Minimum Support Price is a sound policy as it gives assurance to farmers of a fair price. As it based on a scientific formula that covers all costs plus a return on capital, it is fairly remunerative.

Criticisms of MSP

·        The major problem with this MSP is that it does not work for all crops. It works where the government has machinery for procurement and that too in specific States.

·        As it is an open-ended scheme, there are no limits to procurement, which creates a different set of problems for the government.

·        However, for the other crops there is no systematic procurement, which means that while MSPs are announced, they are not credible if government agencies are not there to procure the crop and the farmer has to sell at the market prices.

Time to revisit

·        To begin with it should be announced only when there is back-end procurement so that it is relevant.

·        If there is no or limited procurement, then the MSP actually sends incorrect signals to the farmers.

·        As these announcements are made before the seeds are sown, farmers take sowing decisions based on these prices.

A well-developed derivatives market can offer a viable alternative to the farmers and the government where a market solution is used for a pervasive problem of sale of product.

For better MSP

·        The way forward is to develop the futures market across all crops and ensure that multiple contracts are in force all the time, especially during the harvest time.

·        This will help in making better sowing decisions on the crop as well as quantum that is sown. They would provide advantage of the upside and cover for the downside at the cost of the option premium. 

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