Minimum Support Price or MSP is a contentious issue both for the farmer and the government. There are a host of considerations where all of them may not be in sync with one another. Whereas there is a production/procurement perspective, there also is a serious financial/fiscal perspective. Many theorists have come up with various claims like 18 lakh crores or even 20 lakh crores if the government were to guarantee a legal MSP. What must be the truth? The fear mongering however, must stop in order that a realistic solution emerges.
Accurately predicting the price of agricultural commodity though tricky, is important for mitigating market risk, increasing income for farmers and for the government accomplishing a macroeconomic regulation. Both qualitative and quantitative forecasting methods are used. Whereas the qualitative method is error prone, the quantitative method may be more useful. However, the best would be an intelligent prediction method for self-adaptation, self-learning, and self-organization. It can also adapt to the characteristics of market price fluctuations of the commodities.
How rational can the MSP be, between various crops? Will it not depend on the procurement and consumption patterns? How much should the government actually procure? Can the government procure all that is produced? Can the size of production be controlled and monitored? Between crops, labour, water, fertilisers required, manoeuvrability between supply chains, feasibility of selling in the open markets etc. are all different, but important.
If assuming that a certain crop is procured in very large quantities because it sells more, farmers will tend to grow it. However, there are other important Kharif crops such as pulses and oilseeds that may be consumed differently, but more labour intensive. Farmers may not grow them for want of viability. Apart from MSP, the farmers may have to be even incentivised to grow them. How then does the government rationalise on MSP?
Crop diversification is a larger problem that seeks answers from the Ministry of agriculture. It also is a Big Data problem. Hiking MSP for incentivising the farmer for crop diversification may only be a small part of a solution.
Simply put, MSP is the rate at which the government purchases crops from farmers. As a thumb rule, it is at least one-and-a-half times the cost of production incurred by the farmers. How rational is this proposition?
Which are the crops under MSP? The Commission for Agricultural Costs & Prices (CACP), in the Ministry of Agriculture and Farmers welfare, recommends 22 mandated crops, out of which 14 belong to kharif, 6 belong to rabi, and 2 are commercial crops. Besides it also recommends a fair and remunerative price (FRP) for sugarcane.
The larger question is how does one fix MSP of a crop? Cost of cultivation, supply and demand situation of the crop, market price trends, both domestic and global and parity vis-à-vis other crops, and implications for consumers that doesn’t result in inflation, soil and water use and terms of trade between agriculture and non-agriculture sectors are all vital factors which must be considered. It is important that the cost of cultivation or the production cost must be estimated correctly. Averaging, heuristics or use of statistics only assume that the original price estimate was correct, which may not be so.
For a start, all input costs like those on seeds, fertilisers, pesticides, hired labour, leased-in land, fuel, irrigation, etc. must be factored. It must also include a notional value of unpaid family labour. Several farmers have loans to repay, a factor if not addressed, can render the whole exercise futile. Similarly, rentals and interest forgone on owned land and fixed capital assets, must also be factored.
In the need for growing rice and wheat, production of cereals declined. A demand supply imbalance exists in favour of them compared to oilseeds, pulses and coarse cereals. Farmers must be encouraged to produce these at least where rice-wheat cannot be grown. This too will need MSP correction.
Finally, a bench mark MSP must be arrived at by averaging the state wise costs. This is a massive task by whichever method one follows. Several subsidies are available to agriculture sector. When the subsidies on fertilizers, power, agricultural equipment, irrigation, seeds, exports, credits, agricultural infrastructure and the direct benefit a farmer receives are also factored, the problem becomes truly complex.
Farmer Unions are demanding legislation to guarantee MSP for all farmers for all crops. Is it possible for the government to legally guarantee MSP in all those 22 identified crops? Does it mean, every produce, from every farmer must be purchased by the government? Is it feasible? Even assuming it is purchased, where would they be stored safely, given that 62000 tonnes of food grains were wasted in a five-year period in the FCI godowns? How is the government going to break the stranglehold that middlemen, commission agents and APMC officials have, on the current MSP-based procurement system? How is the quality measured and what would be the rejection parameters? On the other side, in the absence of assured procurement, farmers really have no incentive to cultivate them.
To be realistic, the government has no machinery for procurement for all crops except wheat and rice currently procured by the FCI under its public distribution scheme. Even here storage is a major concern.
What can the government do in such circumstances? Firstly, it must use new mathematical models to accurately predict the agriculture commodity prices like combining fuzzy information granulation, mind evolutionary algorithms (MEA), and support vector machine, (SVM). The data is available. What is needed is a will.
Secondly it must enact a legislation that confers on farmers ‘The Right to Sell at MSP’. This at least will instil confidence among farmers for procurement of their produce.
Thirdly, the government should also promote crop and animal agriculture that leads to consumption of proteins, vitamins, minerals and dietary fibre as opposed to calories and sugar.
Finally, the government must guarantee to procure a certain percentage of those 22 crops based on the farmers family income and the need of the people without causing inflationary pressures. Again, a big data problem. This will obviously factor in land holdings against the family income. The rest could easily be offloaded in a free market.
The Prime Minister’s assurance to every farmer across India that MSP is here to stay must reassure the farmers. However, can it be a mill around the government’s neck?