Road connectivity to Delhi has been blocked. Seats are not available in trains and airfares have quadrupled. What is going on, you wonder?

Farmers, primarily from Haryana, Punjab and Uttar Pradesh, have once again taken to the streets and are marching towards Delhi. They have a couple of demands, including a legal guarantee for a Minimum Support Price (MSP) for their crops.

In this article, we’ll take a look at a few highlights of the Farmers’ Protest, its impact on the stock market and whether legalizing MSP is a good idea. Keep reading to find out!

Why was the MSP required?

Let’s say that the monsoon and other factors worked in favour of crops, and farmers had a surplus yield of crops. However, we cannot consume more food just because the produce is higher! 

In other words, the supply of crops is high, but the demand has remained the same. Therefore, the price of the crops would decrease. And farmers aren’t quite happy to be in such a situation. Sometimes, the supply can be so high that they may not be able to recover the cost of production. They’d rather destroy some of the crops than pay for transportation and other charges for selling them!

The Minimum Support Price (MSP) was introduced in the mid-1960s to encourage the cultivation of labour-intensive crops such as wheat and paddy as India wasn’t self-sufficient in these commodities back then. Today, India is the largest exporter of rice and among the largest exporters of wheat in the world. However, farmers remain economically vulnerable.

What is MSP?

MSP is a safety net for farmers as it protects them from financial fluctuations and from the outcome of erratic monsoons. It serves as a base price, ensuring that farmers don’t sell their produce below that level and are protected from market losses.

Wheat was the first-ever crop to get an MSP decided. Currently, 23 crops get the MSP. The government buys these crops and stores them for later use or distributes them under various ration schemes.

How is the MSP calculated?

The central government fixes and announces the MSP for crops at the start of the Rabi and Kharif cropping seasons. This decision is made after the government carefully studies the major points put forward by the Commission for Agricultural Costs and Prices (CACP).

The MSP considers implicit as well as explicit costs incurred by farmers. These include family labour, the rental value of the agricultural land, fertilizers, machinery and so on. The CACP also considers demand, stock position, and macroeconomic factors such as consumer price indices and global dynamics to determine MSP for the mandated crops.

When did the protest start?

The protests started on November 25, 2020, when thousands of farmers, mainly from Punjab and Haryana marched towards Delhi. They demanded a repeal of three contentious farm laws:

  • Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020
  • Essential Commodities (Amendment) Act, 2020
  • Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020

The farmers feared that these laws could lead to the abolishment of the MSP guaranteed by the government on select crops and leave them at the mercy of big corporates. However, the Acts did not mention anything as such. Giving in to the protest, both houses of the Parliament cleared the Farm Laws Repeal Bill on November 29, 2021.

What’s bothering the farmers now?

Though the new laws were repealed, there was insecurity around the MSP. MSP procurement isn’t codified under any law. There is a possibility that the government could turn their back on it at any point in time, in spite of political repercussions. Basically, the farmers want a new law enacted around MSP so that they won’t be left at the mercy of market forces.

In the current scenario, the government can buy produce at the MSP, however, it may not buy the entire quantity available. It can buy the produce based on how much it can store and distribute within the country. Moreover, this largely benefits two crops — wheat and rice. Thus those farmers who are farming other crops can still feel left out.

Is legalizing MSP a good idea?

Agriculture contributes at least 15% to India’s GDP, and it generates employment for close to 50% of the country’s population. However, media reports claim that merely 6% of the farmers in India benefit from MSP. According to NSSO’s report, as of 2018-19, approximately 10% of the farmers in India sold their produce at MSP. 

This number isn’t substantial. If a majority of the farmers aren’t able to benefit from the MSP, they may lose money, end up in a debt spiral or may be forced to leave farming altogether.

Guaranteeing an MSP will likely help with crop diversification. However, if wheat and rice are the only crops that benefit largely from the MSP, farmers wouldn’t be interested in growing other crops. This could take a toll on the environment as rice requires a lot of water to grow.

Moreover, rice and wheat contribute heavily to stubble burning in the north. They leave residue in the fields which needs to be cleared before the next sowing season. This could damage the environment excessively. 

In the case of cereals, the concentration of procurement is confined to specific states such as Punjab, Haryana, Uttar Pradesh, Madhya Pradesh, Chhattisgarh and Telangana. MSP could protect the interest of farmers, encourage geographic crop diversification and protect the environment.

Additionally, the government can use MSP as a tool to encourage the cultivation of certain crops by offering larger MSP increases for those crops. For example, maize can be used as a source of ethanol to reduce crude oil imports and could get a higher MSP.

What could go wrong if MSP is legalized?

There are pros, and then there are the cons.

If MSP is legalized, no one can pay less than the MSP to buy a certain crop. Imagine a situation when the supply of crops is high. Ideally, the price should be lower, however, people will have to pay the minimum price that is set by the government. Anyone who buys crops below the MSP could face legal consequences.

Legalizing the MSP could cost the government anywhere between ₹6 – ₹9 lakh crores. The government will have to build infrastructure for the storage of these grains. That’s a lion’s share! In fact, it is about 20% of India’s annual budget. This could quickly empty the government’s coffers, and there won’t be money left for developmental activity.

Effect on the stock market

The objective of the 2020 Farm Act was to empower farmers to freely sell their produce in any market, moving beyond the confines of local Mandis. This move was expected to improve the agricultural supply chain in India and develop the sector with the introduction of private players. However, farmers want more.

A significant demand that has been put forth is the increase in MSP and a pledge to extend the scheme to cover all crops. Moreover, they are demanding the implementation of Dr Swaminathan Commission’s formula for calculating MSP instead of the current formula.

For context, the existing formula sets the Minimum Support Price (MSP) at 50% above the all-India weighted average cost of production. Basically, it may lead to huge profits that no manufacturing & services company in India can achieve easily. Moreover, it could potentially lead to an increase in the prices of food grains in the range of 10% to 30%.

India is bracing itself for a National Election; however, the ongoing agitation hasn’t impacted the stock market substantially. This may be because the prices of food grains are still stable. 

What’s the solution?

There are suggestions around allowing farmers to sell their crops in the open market. If the price is lower than the MSP, then the government could compensate them for the difference between the two values. This will reduce the monetary burden as well as free up the need for storage.

But things are not as easy as they seem. People have found a way to scam this system. The government of Madhya Pradesh implemented a similar plan in 2017. Traders found a way to rig prices and show crops trading at prices below the average set price in order to show a wider difference and make more money.

A few other folks suggest that direct income support for farmers is better than setting up the MSP. The PM Kisan Scheme already does this, but they want an extension.

As far as the protest is concerned, it looks like discussions will go on for a while. We can only hope that the farmers and the government reach a middle ground.