Title: Minimum Support for Small Farmers
Relevance: GS 2
Why has this article surfaced?
Recently, the government has declared the MSP hike for the 2019 kharif marketing season.
Problem in Implementation
The most worrying aspect is the implementation of these assured prices, especially for the small and marginal farmers. Evidence from various parts of the country reveals that the market prices of several major crops fell far below the announced MSP during the kharif season in 2017–18. Of what use is such a hike in MSP if it cannot be implemented?
Widening gap between MSP and Market Prices
- The widening gap between market prices and the MSP is indicative of the mismatch between production-augmenting and agri-marketing policies.
- This gap arises out of the fact that MSP estimations are conventionally based on a cost-plus-pricing formula that ignores the demand side of commodities.
- An MSP higher than market prices would lead to an unprecedented increase in production. But, in the absence of commensurate demand, this could result in a glut in the market and prices would crash further below the MSP.
- The implementation of MSP in India is ensured through public procurement. Except for paddy and cotton, other kharif crops covered by the increased MSP do not have a robust procurement system.
- The price volatility of agricultural commodities in India cannot be fully explained by production shocks alone. Nearly half or more of the price formation of these commodities takes place after the harvest.
- The post-harvest value chain is usually fragmented with many middlemen. Intermediaries exploit production-induced surplus and scarcity situations to optimize their margins, while farmers end up receiving low prices irrespective of good or bad harvests.
- Farmers are under pressure to sell their produce immediately after the harvest. This makes their supply inelastic, while traders can afford to wait strategically for the right time to buy.
- Moreover, in the absence of diverse marketing mechanisms, uncertainties regarding the timeliness and the stock limits of MSP procurements are likely to depress market prices, with traders taking full advantage of it.
- The distortionary effects of support prices are, therefore, likely to create havoc for farmers, especially small farmers who generally sell their produce at the farm-gate level to aggregators. They would be the worst victims of these low market prices, as support schemes like the MSP never reach them.
Unless interventions are dovetailed with heavy investments in marketing infrastructure, storage, and food processing, as well as changes in the Agricultural Produce Market Committee Act, 2003 to allow direct buying from farmer producer organizations and bypassing the archaic mandi system, raising the MSP alone will be useless to these vulnerable farmers.