If market prices fell below the MSP, farmers could sell their produce to the state-owned FCI or some other such procurement agency—to that extent, MSP acted as a floor price.
When the central government came up with the idea of a Minimum Support Price (MSP), most imagined this would end distress sales by farmers since, if market prices fell below the MSP, farmers could sell their produce to the state-owned FCI or some other such procurement agency—to that extent, MSP acted as a floor price. As time went by, this hope was belied since FCI procurement remained limited to just a handful of crops like wheat and rice and to just Punjab and Haryana—some enterprising state governments, like in Madhya Pradesh and Chhattisgarh, though, did establish their own procurement centres to ensure their farmers got the benefit of MSP. The Shanta Kumar report on agriculture had estimated that just around 4% of the country’s farmers benefited from the FCI-led MSP system.
To that extent, the Madhya Pradesh government proposal to look at a deficiency payment is a good one. Based on what is planned, the government will pay farmers if they sell their produce at below the MSP—the difference between the MSP and the rate they are selling their produce for is to be compensated through transfers to their bank accounts. Immediately, the problem of low or no procurement goes away for all crops that have an MSP. Indeed, the state’s agriculture secretary has also said that the scheme may be extended to horticulture crops as well in the future—considering India has greater production of horticulture than it does of foodgrains, this is important; also, it is the collapse of horticulture prices that is behind the current agriculture distress.
While it is not clear how soon, if at all, other states—or the central government—will move to such a system, if it this does happen, some caution is required. For one, since all farmers will have access to deficiency payments—as opposed to FCI-style procurement—the impact on the treasury can be significant; sustaining this will mean some other subsidy, say that on fertilisers, will have to be cut to pay for this. Also, since MSPs will, in this system, truly act as a floor price for agriculture markets, this means the Centre/states will have to be a lot more responsible when it comes to fixing MSPs since a high MSP can contribute quite significantly to inflationary tendencies.
Ideally, allowing markets to function more freely and to look at deficiency-based insurance products should also be experimented with to see what works better, but this is a good start. To the extent it results in the eventual shutting down of the inefficient FCI and the central government moving to DBT-payments in cash instead of physical rations, this will also result in considerable savings—of over Rs 40,000 crore a year based on current costs/prices.