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Legally Guaranteed MSP: A two pronged problem for the farmers.

A legal guarantee of Minimum Support Price(MSP) may sound "morally fair" and "ethically correct" but economics is a science and guaranteed MSP will be the final nail in the coffins of the farmers.

But why?

1) The Food Corporation of India (FCI) is responsible for the procurement of agricultural produce from the farmers at MSP. However, only 6% of the farmers in India (mainly Punjab, Haryana and some parts of Uttar Pradesh) comprise of it.

The FCI is already flooded with wheat, rice and sugar and these item rot every year because of more supply than demand. These excess production is then sold to the different private traders at a lower rate than the MSP.

A legally guaranteed MSP may marginally increase the percentage of farmers who get covered by it but will kill any incentive for private players to buy from the farmers who are not covered by the mandis and FCI procurement. They would rather let the crops be procured by FCI and buy from them at a cheaper price than the MSP!

The 92-94% of the farmers who don't have access to mandi system will eventually lose out the Avenue to sell to private traders.

2) A legally guaranteed MSP will also leave no incentive for contract farming to reduce the price of production.

For example,

Company 'K' may get into a contract with 10 farmers who produce rice in a 2 acre farm land each.

'K' has access to high end farming technology that can reduce the price of production for rice for the farmers. But, Company 'K' will have no incentive to share that technology with the farmers because 'K' will NOT be able to purchase wheat below MSP!

There will not be any sort of incentive for any company to reach out to the farmers and share their technology and hence production prices will remain high. Farmers will continue to pay more, as well and the consumer.

These two are the major reasons why an appeal for Guaranteed MSP is not backed by any agricultural economist and is merely an emotional and a political driven demand.

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