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Legalising MSP
Context:
The debate around a legally binding Minimum Support Price (MSP) for crops has gained momentum in recent years. Farmers demand its implementation, citing persistent issues such as inadequate crop insurance and price suppression due to export restrictions. However, focusing solely on MSP could lead to broader inefficiencies in agriculture and the economy.
Why Legalising MSP is Not the Final Solution
- Narrow Focus on Price Stability:
- Legalising MSP addresses price volatility but overlooks other significant risks, such as climate-induced yield shocks.
- It risks undermining market dynamics, potentially discouraging crop diversification and innovation.
- Impact on Non-Cultivators: MSP frameworks often ignore rural livelihoods beyond farming, such as traders and labourers integral to the agricultural supply chain.
- Fiscal Sustainability Concerns: Guaranteeing MSP for all crops could lead to unsustainable fiscal burdens on the government, diverting resources from other critical sectors.
Problems in Indian Agriculture That Cannot Be Resolved by Legalising MSP
- Climate-Induced Risks: Unpredictable weather patterns cause yield shocks, a challenge MSP cannot address.
- Changing Dietary Preferences: Increasing demand for diverse foods such as fruits, vegetables, and pulses necessitates shifting production patterns, which MSP-centric policies fail to encourage.
- Structural Inefficiencies: Lack of robust crop insurance, market infrastructure, and post-harvest facilities perpetuates rural distress.
Two Best Policy Instruments to Address These Challenges
a). Income Support and Price Deficiency Payments
Steps to Boost Income Support:
- Q-UBI: Introduce a targeted quasi-Universal Basic Income (q-UBI) for rural households, extending beyond cultivators.
- Set q-UBI payments higher than existing PM-Kisan payouts, aligned with the average income of a five-acre farmer.
- Ensure meaningful coverage of both price and quantity shocks, protecting rural incomes comprehensively.
Limitations of MSP in Supporting Income
- MSP excludes stakeholders like landless labourers and traders.
- It does not address income losses caused by production shortfalls due to weather anomalies.
Benefits of Price Deficiency Payments
- Compensate farmers for a percentage of losses when prices drop drastically in a district.
- Encourage market discipline and adaptability without distorting prices.
- Protect farmers from extreme volatility while allowing them to respond to market signals effectively.
Balancing Income Support and Price Deficiency Payments
- Income support provides a baseline safety net for rural households.
- Price deficiency payments address price fluctuations, ensuring resilience in agricultural markets.
- Both mechanisms together create a stable and dynamic framework.
Prerequisites for Robust Implementation
- Establish a comprehensive market intelligence system for real-time monitoring of prices and production trends.
- Develop state-level capacity to manage disbursements and ensure accountability.
b) Decentralised Public Procurement at Market Prices
- Issues in the Present Procurement System:
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- Over-reliance on a few crops leads to excessive stockpiling and wastage.
- Lack of storage facilities and transportation infrastructure exacerbates inefficiencies.
- Poor targeting of beneficiaries increases fiscal burdens without proportional benefits.
- Decentralised Procurement Under PM-AASHA
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- PM-AASHA allows states to procure crops based on local demand.
- States must take the lead in implementation with central support for funding and monitoring.
- Improvement Measures
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- Ensure all procurement occurs at market prices to minimise distortions.
- Enhance state accountability by linking procurement funds to performance metrics, reducing wastage.
- Expanding Public Procurement
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- Expansion of procurement : Extend procurement beyond rice and wheat to include pulses, onions, and other essential crops.
- Align procurement strategies with changing dietary patterns and nutritional needs.
- Leverage existing welfare programmes, such as the Public Distribution System (PDS) and mid-day meals, to create demand for diverse crops.
