Resource centre on India's rural distress

Strengthening the MSP System -MS Sriram

The MSP system has long been the central topic of discussion in agricultural reforms.

The MSP system has long been the central topic of discussion in agricultural reforms. Demystifying its pros and cons, PROF M S SRIRAM writes on what we can learn and do to make MSP an effective mechanism that empowers farmers.

ARGUMENTS against a statutory minimum support price (MSP) have hovered around the following lines:

The MSP benefits only a small proportion of Indian farmers, mostly in Punjab and Haryana, and primarily is for rice and wheat. The government can provide written assurances of continuing with MSPs but formalising it into law could shackle the market and might go against the interests of the farmers.

A further argument is that the alternative to the state-run mandi system is opening up markets to the private trade and that Farmer Producer Organisations (FPOs) can act as safety nets against the exploitation by private traders.

Both these arguments have been made recently by the economist Ashok Gulati in a newspaper op-ed.

We would like to address these issues from an alternative vantage point of the fundamental imbalance between farmers and private buyers.

Understanding the structural asymmetries in agricultural trade

Contracts between farmers and buyers are completely asymmetrical. Farmers are at the vulnerable end, being susceptible to multiple uncertainties. The only thing under their control in the area in which the crop could be sown and the inputs that she could apply. Only a part of the uncertainties is addressed by scientific practices, and with assured irrigation and other inputs but ultimately the yield is as much a function of the farmer’s skill as the external environment. Post-harvest, the farmer is usually a price taker because of the size of holdings and quantity of produce, the inability to stock, and the inability to hold out due to the pressing need for money for the next crop cycle.

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