What is MSP, how is it calculated and reason behind the farmers protest?

Topics to be covered are:

What is MSP?

Who fixes the MSP?

How is MSP calculated?

List of crops put under the MSP (2020-21) marketing season

Reason behind the farmer’s protest

As we know that these days farmers are protesting against three farm bills namely Essential Commodities (Amendment) Act, 2020, Farmers’ (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 and Farmers’ Produce Trade Act and Commerce (Promotion and Facilitation) Act, 2020.

The central government has also held few discussions with the farmer unions but still, the issue remains unresolved. Farmers are protesting due to MSP. It is the main reason behind the farmer’s protest. Farmer’s fear that these new farm bills will dismantle the Minimum Support Price (MSP) system and corporatize farming. At several Delhi border points, thousands of farmers are protesting.

What is MSP?

MSP is Minimum Support Price that is the government sets on agricultural product price to purchase directly from the farmers. Or we can say that MSP is the minimum price that the farmers get for their crops above the production cost. On agricultural product, the MSP rate acts as a safeguard to the farmer to a minimum profit for the harvest, in case the open market has a lesser price than the cost incurred.

The Union Budget in 2018-19 announced that the MSP for crops will now be kept at 1.5 times the production cost with an objective to double the income of the farmers by 2022. And therefore, accordingly, the Government has increased the MSPs for 2020-21 marketing season for Kharif, Rabi and other commercial crops.

So now u may have understood that MSP is the price that is fixed by the government of the crops produced by the farmers. And it is the price that is paid by the government to procure the crops from the farmers. MSP is nothing but a guaranteed price which safeguards the farmers with a minimum profit for their harvest if in case the open market keeps the lesser price for farmer’s crops.

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020: Explained

Now, the question arises that MSP is fixed by whom?

The answer to the question is that the MSP is fixed by the Central Government of the 23 agricultural crops. It is based on the recommendations of the Commission for Agricultural Costs and Prices (CCP) and is also responsible for fixing the FRP (Fair and Remunerative Price) of sugarcane. The MSP is foxed by the CACP after taking into consideration the domestic and international prices of crops, intercrop price parity and the demand-supply situation.

How is MSP calculated?

Finance Minister Arun Jaitley’s Budget speech in 2018 did not specify the cost on which the 1.5 times formula was to be computed. But the CACP’s ‘Price Policy for Kharif Crops for the marketing season 2018-19 stated that its MSP recommendation was based on 1.5 times the A2+FL costs.

The 1.5-times MSP formula was originally recommended by the M S Swaminathan, the National Commission for Farmer’s head and was also promised that 2014 Lok Sabha election by the BJP that it should have been applied on the C2 costs.

Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill, 2020: Explained

Three variables are prescribed by the Swaminathan Committee to determine the production cost namely;

A2: It is the out-of-pocket expenses which is incurred by farmers like a loan for fertilisers, fuel, machinery, irrigation, etc. and cost of leasing land

A2+FL: Is the estimated value of the unpaid labour for harvesting crops like the contribution of family members, etc. In addition, it is paid-out cost.

C2: It is Comprehensive Cost which is the actual cost of production. It takes into account for rent and interest foregone on the land and machinery owned by farmers further in addition to the A2+FL rate.

The ideal formula which is recommended by the Committee to calculate the MSP is:

MSP = C2+ 50% of C2

And the 1.5 times formula to calculate the increased MSP is

1.5 Times MSP Formula = 1.5 times the A2+FL costs

The demand of the farmers is that the 1.5 times MSP formula should be applied on the C2 costs. The Government after considering this stated that the Production Cost is one of the main factors to determine the MSP. Also, the CACP considers all the costs in a comprehensive manner.

To determine the MSP, the CACP considers both C2 and A2+FL costs. For return, the CACP considers the A2+FL formula and C2 formula as a benchmark reference costs which makes sure that the MSP covers the production cost.

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Factors that are considered before recommending MSP are :

Cost of production,

Overall demand-supply situations of various crops in domestic and world markets,

Domestic and international prices,

Inter-crop price parity, terms of trade between agriculture and non-agriculture sector, likely effect of price policy on rest of economy and a minimum of 50 percent as the margin over cost of production.

Essential Commodities (Amendment) Bill, 2020: Explained

For 2020-21, list of crops under MSP are:

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Reason behind farmers protesting MSP :

As discussed above that farmers fear that these three farm bills which are passed by the central government will do away with the MSP because these three bills does not mention much about MSP or just a little was mentioned. But the government has announced verbally that the MSP will stay and the farmers find it hard to trust the same.

Mainly, the farmers of Uttar Pradesh, Punjab, and Haryana are angry with the provisions of these Bills. They are afraid that these Bills may be the platform that the central government is setting up for the replacement of the robust support system that is prevalent in their states for the purchase of their crops.

They know that MSP was a guarantee that was their safety since the Green Revolution of the 1960s kicked in and due these three farm bills it can be snatched away under the context of giving the farmers more playing ground and better platforms.

In these areas, the state-government driven crop produce procurement infrastructure is very good. Here, Procurement is Food Corporation of India at promised MSP to farmers and is declared before every agriculture season which encourages the farmers to focus on producing more yield. 23 agricultural crops have MSPs and the governments primarily buy only rice and wheat.

The main fear within farmers is that these bills will kill the government procurement process as well as the MSP. Also, we see most protesters from Punjab and Haryana because they are the biggest beneficiaries of this safety net.

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About the farmers of Punjab and Haryana

According to certain reports, nearly 89 per cent of the rice produced by the farmers in Punjab is procured by the government and in Haryana it is 85%. Therefore, farmers of Punjab and Haryana face nor price risk and are in fact incentivized to grow paddy and wheat.

Also, it has been seen that the nation has been facing a shortage of pulses, wheat and rice instead it has been in surplus in FCI’s godowns. Rice is a water-intensive crop and the farmers from areas with the shortage of water to grow rice are risky but an MSP assured in the end. As per the government study “continuous adoption of rice-wheat cropping system in North-Western plains of Punjab, Haryana and West Uttar Pradesh has resulted in depletion of groundwater and deterioration of soil quality, posing a serious threat to its sustainability.” Further, these Farm Bills are encouraging the farmers to deal with the large corporate and the farmers do not trust corporates.

UPSC Monthly Current Affairs Capsule: November 2020

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