Day 32 – Q 1.Even though the policy of minimum support prices has benefitted the farmers to an extent, its distortionary effects on the free market economy can’t be ignored. The policy has also led to lack of diversification of agricultural produce and its benefits are unequally distributed. Elucidate.

1. Even though the policy of minimum support prices has benefitted the farmers to an extent, its distortionary effects on the free market economy can’t be ignored. The policy has also led to lack of diversification of agricultural produce and its benefits are unequally distributed. Elucidate. 

भले ही न्यूनतम समर्थन मूल्य की नीति ने किसानों को एक हद तक लाभ पहुंचाया हो, लेकिन मुक्त बाजार अर्थव्यवस्था पर इसके विरूपण प्रभाव को नजरअंदाज नहीं किया जा सकता है। इस नीति के कारण कृषि उत्पादों के विविधीकरण में कमी आई है और इसके लाभ असमान रूप से वितरित किए गए हैं। स्पष्ट करें।

Introduction:

The minimum support price mechanism is in place from 1966-67 in the wake of Green Revolution. Minimum Support Price is the price at which government purchases crops from the farmers. Though the mechanism has saved the farmers from the depleting profits, it has resulted in market distortion and increasing farmer inequality.

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MSP benefitting the farmers:

After the introduction of MSP, the farm cropped area increased by 10 % with a decade. The average yield due to investment by farmers by additional income because of MSP increased on an average 80% within decades. Apart from this, MSP benefitted farmers by

• Surety of minimum price: MSP acts like a buffer to protect the farmer in case the price of the commodity produced by the farmer falls below the market price due to bumper crop which causes a glut in the market.
• Shock absorber: It prevents distress sale by the farmer in case of a bumper crop and market demand is low to recover the cost of production. Further, it can also counter the agricultural distress brought on by natural hazards in the country.
• Crop diversification: Introduction of new crops like pulses in the MSP will encourage the farmers to grow nutritional crops. It will help in changing the cropping pattern which was long due.
• Farmer Income: A higher Minimum support price regime will also help in achieving the Government s target of doubling farmer s income by 2022.
• Farm Investment: Higher profits for the farmer will also help them to invest in necessary infrastructure and equipment.
• Due to lack of sufficient penetration of agricultural insurance schemes farming has become a risky profession exposed to weather and price fluctuations. The minimum support price to some extent will protect the farmer by guaranteeing a minimum floor price so that they can plan in advance for the next season.

Distortionary effect on free economy:

Almost, 2/3rd of the cereals are procured by the government through MSP leaving only 1/3rd to open market. As a result, a farmer who chooses the MSP route cannot take advantage of beneficial market prices and has to depend solely on the MSP. It prevents earning of profit by the producer.

• The government policy of MSP and PDS is challenged in the WTO as distortion to free trade.
• The procurement policy of FCI in the MSP mechanism has disadvantages like no auto liquidation, adverse countercyclical policy etc., results in inflation of food grains due to hoarding which in turn impact free economic prices.
• The government being the only player has little involvement from the private sector in MSP regime and hence a free and fair open competition is missing.
• MSP will set a cap on agriculture price and often it is seen that the prices stay below MSP which otherwise would have increased or decreased based on market forces.
• The present setup will affect the farmers directly selling their produce or the agents/mandis selling in to the open market.
• The announcement of MSP will often lead to surplus production which will distort the control of production by market forces. E.g. For example, price incentives given for pulses led to over-production price-collapse.

MSP leading to lack of crop diversification and unequal distribution:

MSP is skewed towards only few crops like paddy and wheat. This has changed the crop pattern in favor of those crops. For instance, despite the lack of water availability, states like Punjab and Haryana mainly produce wheat and paddy only for the reason of MSP. Inclusion of new crops as done recently for pulses is needed. This would help in crop diversification and inclusion of small and marginal farmers. Further, the present mechanism has resulted in 

• Regional imbalance: Except for in states like Punjab, Haryana, Karnataka etc., where the procurement mechanism is robust, the farmers are majorly benefited by MSP.
• MSP is successful mainly in irrigated areas with large production farms and therefore the rainfed areas with crop likes millets etc., doesn’t benefit much from MSP and hence inequality is created.
• In most states, prices in mandis (wholesale markets) remain below MSP (minimum support price) for most of the season. These are causing the whole MSP policy to leave farmers dissatisfied and in distress.
• Effect on small and medium scale farmers: MSP favors big farmers due to high quantity of production. Without decentralized method of crop collection under MSP, small and marginal farmers are mostly not able to use the mechanism. It results in unequal distribution of profits and benefits.

Conclusion

NITI Aayog estimates an increase of up to 8% due to the hike in MSP in the latest budget. Thus, MSP with not an iota of doubt helps farmer. However, the reforms needed in procurement mechanism, FCI institutional overhaul with limited buffer stocks, connectivity, decentralized collection as well as diversifying the crop portfolio will help in realizing the objective of MSP.