States prefer costly MSP scheme but high cost may deter adoption

Most states favour a high-cost system for determining minimum support prices (MSPs) for agricultural products. This system, called the market assurance scheme, provides them operational freedom to procure and dispose of commodities, while the Centre bears a share of the expenses.

At present, a high-powered panel of ministers headed by Home Minister Rajnath Singh is trying to finalise the ideal method for determining MSPs.

According to a concept note prepared by the NITI Aayog, the market assurance scheme allows for 100 per cent compensation from the Centre to the states if the loss in procurement and other operations is 25 per cent of the MSP of a crop. The Centre will provide 60 per cent compensation if the loss is 25-30 per cent, and if the loss is 30-40 per cent, it will be shared equally between the Union government and the states.

“Setting aside the cost of procurement, the payment of price loss to farmers in this scheme has an in-built ceiling of 25 per cent,” the note said.

However, the cost involved in operating this programme could become a deterrent to its adoption.

If the price loss under this scheme touches 15 per cent of MSP, the total expenditure will be about Rs 403.3 billion. The expense will be about Rs 537.7 billion if the price loss touches 25 per cent of MSP.

This calculation assumes wheat and rice are not included in this procurement system and almost 40 per cent of the total production is sold as surplus.

A cheaper option for determining MSPs could be the price deficiency payment scheme, loosely based on the Bhavantar model of Madhya Pradesh. This is expected to cost the exchequer about Rs 225.8 billion if the loss is 15 per cent of MSP and Rs 363 billion if the loss is 25 per cent of MSP. Again, wheat and rice are not part of the calculations.

But, not many states are in favour of this model. 

The private procurement model in which players independent of the government machinery are invited to participate in purchases through a transparent process is the third model being discussed.

All states seem interested in it, but mostly as a supplement to the other two and independently in some cases, the note added. States that implement the private procurement model are compensated, while private players are also offered some concessions and relaxations in income tax.

The note also said implementing MSPs along with raising them to 50 per cent of the production cost will push up agriculture incomes by at least 24 per cent, but could have adverse implications for inflation and consumers. This can be addressed by an efficient supply chain and competitive markets. 

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