This year, the government announced an increase in the Minimum Support Prices (MSP) for farmers, those national benefactors who are mostly forgotten. The MSP for 14 crops sown in the summer was increased. The price of paddy was hiked by 13 per cent to Rs 200 per quintal, the most important crop, while the MSP for cotton saw a hike of 28 per cent.

This was called a “historic decision” by the government, but it immediately set off a ripple of fear among consumers in cities. Will inflation shoot up? Shall we now have to pay more taxes in order to maintain the farmers? What will be the price of food items on our table?

“It’s going to be another year of high prices,” said Mitali Vasudev, a homemaker. “It’s our daughter’s marriage this year. How will we cope if the prices of vegetables and other items shoot up?”

Even the Niti Aayog, Reserve Bank of India and other industry leaders have expressed their worries. And yet, is there really any cause for worries over inflation due to the MSP hike?

What is the Minimum Support Price?

The Minimum Support Price forms part of our agricultural price policy.  It is the price at which farmers’ produce in certain crops is bought by the government during the relevant seasons.

Why does the government set this price?

Most farmers can usually sell their products in the open market. However, when the market prices dip to a level that is below the MSP, the government agencies need to step up and do the needful – in other words, buy over the produce in order to protect the farmers. It thus constitutes direct market intervention to stop “distress sale”.

Both farmers and consumers have to benefit from a balanced and integrated price structure for crops. A farmer might get a great return on his produce during a short supply situation, but during a season of bumper harvest, he might actually be subjected to low returns. The MSP magic wand has to be waved to ensure that farmers get a minimum price even when the markets are not in their favour.  If they do not get relevant MSP, farmers may not find it lucrative to grow certain crops, leading to poor production, that in turn could trigger higher prices.

While the government needs to ensure a fair return for farmers, the market prices of food and other agricultural commodities need to be kept at a reasonable level too. Fluctuations in agricultural commodity prices adversely impact both farmers and consumers.

Who announces the MSP, when and why?

The government, of course! The Cabinet Committee on Economic Affairs announces the MSP at the beginning of every sowing season, also taking into account the recommendations of the Commission for Agricultural Costs and Prices (CACP). It began with a committee on August 1 1964, that advised the Agriculture Ministry to peg rice and wheat prices and later coarse cereals too.

The MSP is fixed by the Central government, based on the average of MSP proposals made by various states, some of which can be higher than the Centre’s recommendation. While the proposals based on input costs vary from state to state, the MSP is fixed to avoid price inequity.

What are the factors that influence the MSP?

In recommending the MSP for a crop, the CCEA factors the following:

• demand and supply
• cost of production
• trends in domestic and global markets
• their impact on consumers

The CACP releases annual price policy reports for five kinds of commodities in the kharif and rabi seasons, sugarcane, raw jute and copra seasons.

For which commodities are MSP given right now?

Here is a list of the crops you know and buy: paddy, wheat, maize, sorghum, pearl millet, barley, ragi, gram, tur, moong, urad, lentil, groundnut, rapeseed-mustard, soyabean, sesamum, sunflower, safflower, nigerseed, copra, sugarcane, cotton and raw jute.

So how have the prices been fixed? Check it out in the Price Chart below. (Source: Parliament papers/CACP)

Will the MSP be hiked again in the next rabi season? In the years to come?

It hasn’t been announced, so most probably not – if the elections are over by then. It has been seen over the years, that MSP is mostly used by governments as a tool immediately before elections.

How effective is the MSP?

Agricultural experts don’t find the government’s action too helpful. Many of them complain of delays in  setting up of procurement centres. There could also be exploitation by commission agents or ‘Arthiyas’. They have been reported to have bought the farmers’ produce at much below the MSP.

The supply chain is complex and gives an edge to middlemen, who seem to be artificially creating price disparities. They use their position to buy at a rate that is much less than the price at which they sell their produce.

An EPW editorial points to evidence of market prices of several major crops falling far below the announced MSP during the kharif season in 2017–18.

When MSP exceeds market prices and government procurement does not work efficiently, farmers might be left with excess products, which would only bring them losses, often more than they had factored in.

Would you have to spend more on food this season because of the MSP hike?

Not really! The consumer in the city can rest assured that inflation will not shoot up much due to the MSP rise.

Firstly, the rise in MSP has been fixed only at a margin above the value of inputs and the imputed value of family labour. It does not include the capital or rental costs, which means that food prices will not shoot up too much, even if we were to assume perfect procurement at new prices.

Second and more important is the fact that procurement for commodities on the MSP list are selective and limited, both in terms of commodities and the regions where they are procured, as this article discusses. The EPW editorial mentions that for the 45 pulses and oilseeds procured at MSP from 11 states in 2017–18, the procurement rate was less than 10% of the produce for more than 60% of the commodities on the list.

Third, as already mentioned above, the final price that the buyer in the city has been paying is entirely manipulated by the middleman. In the Indian scenario, the farmer is inevitably under pressure to sell his produce immediately after the harvest, thanks to small plots, poor storage, his inability to control supply once seeds have been sown and the limits on MSP procurement. In this situation, she has no pricing power.

Why are there worries about the MSP leading to price rise then?                                                                   

Food and trade policy analyst, journalist and agricultural scientist, Devinder Sharma, says that any rise in any sops for farmers is usually followed by critics spamming it. “Whenever the salaries of employees, bank officials or MPs and MLAs are raised, are there any worries over inflation? But if the MSP for farmers goes up, there is an immediate knee-jerk reaction and fears that the cities will be paying for these farmers.”

He pointed out that the MSP of farmers has actually not gone up much. The Seventh Pay Commission has hiked the salaries for other government professionals, but has increased them for farmers by hardly 19%.

Why are corporate loans waived, when big companies face losses? Why do government employees get regular pay hikes, when farmers’ MSPs are not regularly raised, asks a furious Sharma. It is only when farmers’ loans are waived or their MSPs raised that everyone suddenly gets worried about their prices and taxes getting affected.

But hasn’t the price of vegetables really increased? Why?

Yes, it has. The wholesale prices in India shot up by 5.7 per cent this June. But that has nothing to do with the MSP. The reason for that is the rise in the cost of food, manufactured products and fuel! 

So that is another issue altogether.