What is Minimum Support Price and Why Farmers are Protesting?

What is the tussle between farmers and the Central Government?

The Minimum Support Price issue has been more politicised nowadays, But let's understand everything about it - What is MSP, How it is calculated, What are farmers' demands,  Why the Government is helplessness and the way out on Minimum Support Price(MSP).

As we all know that in the early 1960s India was facing very high shortage of foodgrains. So government planned new agricultural policies that marking the start of the Green Revolution.

In 1964, the government set up the Food Corporation of India (FCI) to procure foodgrains from farmers at remunerative prices, and through the public distribution system to distribute cheap foodgrains to consumers and also maintain buffer stock for food security.

In order to buy foodgrains from farmers and to encourage farmers to produce required crops there had to be a policy on pricing. Therefore in 1965, an Agricultural Prices Commission was set up to advise on the pricing policy for agricultural commodities and its impact on the Indian economy.

It was how the Price Support Policy of the central Government came in, providing a  solution to agricultural producers against a sharp fall in farm prices and prevailing hunger in India that time. The minimum guaranteed prices are fixed to set a floor below which market prices cannot fall. If no one else buys it, the government will directly buy the stock from farmers through FCI at this minimum guaranteed prices. This is what came to be known as the minimum support price or MSP.

MSP is the guaranteed price paid to farmers when the government buys their agricultural produce. MSP is based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). CACP considers various factors in calculating MSP such as cost of production, demand and supply, market price trends, inter-crop price parity, etc.

The Cabinet Committee on Economic Affairs (CCEA) chaired by the Prime Minister takes the final decision regarding approval of MSPs.The CACP recommends MSPs for 22 mandated crops and fair and remunerative price (FRP) for sugarcane.

The Main Benefits of MSP: 1) Farmers feel secure in investing in the crops for which MSP has been announced as the government will buy at a fixed price.

2) Govt announced MSP for the crops that it required to implement policies such as Public Distribution Scheme and keeping buffer stock for emergency situations.

3) It ensure farmers income when market prices fall below MSP. 

4) Crop diversification which promotes sustainable agriculture.

How MSP is calculated :- The CACP have three formula to calculate production costs:

‘A2’: Covers all paid-out costs directly incurred by the farmer in cash and kind on seeds, fertilisers, pesticides, hired labour, leased-in land, fuel, irrigation, etc (basically cover input costs.)

‘A2+FL’: Includes A2 plus an imputed value of unpaid family labour.

‘C2’: It is a more comprehensive cost that factors in rentals and interest for owned land and fixed capital assets, on top of A2+FL.

Swaminathan Commission suggested that Cost of production (CoP)should be based on C2, proposing the 'C2+50 per cent' formula for setting MSP.

Issues related with MSP or farmers' main demands: 1) The government providing MSP at 1.5 times of the cost of production where CoP is based on A2+FL. However, farmers demands that the cost of production should be based on C2 formula and accordingly MSP should be  C2+50% as recommended by Swaminathan Commission.

2) Another important demand of farmers is that the MSP must be legalized. ( passing an act in the Parliament.)

Why the Goverment is not fulfilling the demands: 1) Calculating MSP using C2 formula will have a huge economic cost to government's exchequer and it will also be against the WTO's trade agreements.

2) Legalising the MSP also has a issue with WTO' trade rules as WTO's trade agreements talk about minimising these types of trade distorting subsidies rather than confirming these .  Let's understand it in a simple way.  

WTO(World Trade Organization) put all agricultural subsidies into three boxes:

1)  Amber Box: subsidies that can distort international trade by making a country's products cheaper in comparison to those of other countries.

The WTO trade agreement requires signatories ( India is a signatories)to reducing trade-distorting domestic supports that fall into the amber box.

Examples: Subsidies for inputs such as seeds, fertilisers, electricity, irrigation, and Minimum Support Price (MSP) also fall in this category.

Signatory countries must keep their amber box support within 5-10% (10% for developing countries and 5% for developed countries) of their value of annual production. (Di Minimus Clause)

2) Blue Box: WTO's this box is basically 'Amber Box with conditions' and these conditions framed to reduce trade distortions.

3)Green Box: Green Box is domestic support measures (without any price support to crops) that don’t cause trade distortion or cause minimal distortion.

They also include environmental protection and regional development programmes. So Green Box Subsidies are allowed generally without any limits. Example in India- PM-Kishan scheme.

Conclusion: So as per WTO norms India being a developing country can't provides Amber Box subsidies (MSP) above 10% of value of its annual production and also India being a global power that talk about strengthening multilateral institutions can't leave WTO. Farmers need to understand it. But, government also need to take note of farmers situations. Thus, government must compensate farmers with Green Box Subsidies such as increase instalment amount for PM-Kishan scheme. And same time also need to put the situation of populous developing country like India to WTO and together with other developing countries try to bring changes to WTO norms and that India is trying as well.