Hike in MSP for kharif crops

What’s in today’s article?

• Why in news?
• What is Minimum Support Price (MSP)?
• Why do MSPs matter?
• Does the government actually buy all crops at MSPs?
• Challenges associated with MSPs
• News Summary: Hike in MSP for kharif crops
• What has been announced?
• What will be the impact of this hike?

Why in news?

• India’s Union government announced the MSPs (minimum support prices) for 17 crops in this year’s Kharif season.
• MSPs play a very significant role not just for India’s farmers and the farm economy but also for India’s consumers and the kind of food prices they face.

What is Minimum Support Price (MSP)?

• About
  • MSP is a form of market intervention (a policy decision not enforceable by law) by the Government of India to insure agricultural producers against any sharp fall in farm prices during bumper production years.
  • Basically, MSPs are support prices announced by the government (and sometimes state governments add a bonus amount to them).
• Background
  • In 1964, Lal Bahadur Shastri formed the Food Grain Price Committee (under LK Jha), to push for a MSP regime.
  • The first MSP announcement was made in 1967.
  • Later, the government set up the Agricultural Prices Commission (renamed as the Commission for Agricultural Costs and Prices (CACP) in 1985) for fixing MSP for crops.
• Announced by
  • the Cabinet Committee on Economic Affairs (Chaired by the Prime Minister of India) on the basis of the recommendations of the CACP at the beginning of the sowing season for certain crops.
• Crops Covered
  • Government announces MSPs for 22 mandated crops and fair and remunerative price (FRP) for sugarcane (total 23).
  • The mandated crops are 14 crops of the kharif (summer sowing) season, 6 rabi crops (Wheat, Barley, Gram, Masur (Lentil), Rapeseed & Mustard, Safflower) and two other commercial crops.

Why do MSPs matter?

• Safety net for farmers
  • As a farmer, one is worried sick each season because one does not know what one’s harvest will fetch. Also, a farmer has little bargaining power in the market.
  • If the market prices are below the farmer’s cost of production they and their families can be ruined.
  • By announcing MSPs, the government makes a promise that it will buy (called procurement) from farmers at the announced prices.
• To protect consumers
  • If one particular crop, say cotton, led to the ruin of many farmers, then farmers will avoid growing cotton next season.
  • This, in turn, will reduce supply and push up prices. Higher prices will then show up across the different products for consumers.
• To tweak the production pattern
  • If the government wants to incentivise the production of pulses, as against paddy (rice), then it can give a relatively higher hike in MSP of pulses than the MSPs for paddy.

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Does the government actually buy all crops at MSPs?

• No. It is important to remember that, while the government announces MSPs for a whole host of crops both in the Rabi (winter) and the Kharif (summer) season, it procures only a few of those crops and that too from only a few states.
• According to a CRISIL research report, crops such as paddy, cotton and, to a limited extent, pulses get procured at MSP.
• Only few Kharif crops benefit from government procurement.

Challenges associated with MSPs

• While a sharp rise in MSPs (or higher MSPs over a sustained period) does alleviate farm distress, it can also lead to a spike in food inflation.
• The trade-off between the interests of the farmer, on the one hand, and consumers, on the other, makes deciding MSPs so difficult.
• The political dimension just adds to the complications.

News Summary: Hike in MSP for kharif crops

What has been announced?

• Recently, the government announced that MSPs for the Kharif season will go up by an average of 7%; the actual range varies between 5% to 10.5% depending on the crop.
• As per analysts, this is the highest MSP increase in the last 5 years and the second highest in the last decade.

What will be the impact of this hike?

• On food inflation
  • It is unlikely that this hike per se would spike inflation.
  • However, it is noteworthy that food inflation may still spike if the normal monsoon is affected by El Nino.
• On government’s finances
  • Higher MSPs and more procurement as well as the storage and disbursal of subsidised foodgrains are all expenditures that weigh down government’s financial health.
  • According to a study, this MSP increase will not materially alter the government’s food subsidy budgeting.
• On rural consumption
  • The 7% MSP increase might just be enough to cover the increase in cost of production.
  • It does not signal a pre-election populist boost to rural consumption.

Q1) What is Commission for Agricultural Costs and Prices (CACP)?

The Commission for Agricultural Costs and Prices (CACP) is an advisory body in India that provides recommendations on pricing policies for agricultural commodities. It was established in 1965 and operates under the Ministry of Agriculture and Farmers Welfare. The primary role of the CACP is to assess the cost of production, input prices, and market trends for various agricultural crops. Based on these factors, the CACP suggests minimum support prices (MSPs) for major agricultural commodities like cereals, pulses, oilseeds, and other crops.

Q2) What is Cabinet Committee on Economic Affairs (CCEA)?

The Cabinet Committee on Economic Affairs (CCEA) is a key decision-making body in the Indian government that deals with economic and financial issues. It is a committee of the Union Cabinet, which is the highest decision-making body of the government of India. The CCEA is responsible for making decisions on important economic policies and programs proposed by various ministries and departments. It considers matters related to the overall economic development of the country, including sectors such as agriculture, industry, infrastructure, energy, trade, and investment.

Source: ExplainSpeaking | Making sense of Modi govt’s latest MSPs: Good economics and bad politics or the other way around? | Indian Express