According to a Crisil analysis, the MSP is inefficient because of the low intake and large price discrepancies between support and market pricing. The government announced on Wednesday that the minimum support prices (MSPs) for the Kharif marketing season (2022-23) will increase by an average of 6%, the greatest increase in the last three seasons.
According to the analysis, the MSP's influence on 12 of the 14 crops covered by the scheme has been almost nil during the last three years.
Crisil said that only paddy and cotton, out of the 14 crops covered by MSP, experienced meaningful procurement in the last three years, with 45 percent of paddy and 27 percent of cotton output procured at MSP, but barely 4-5 percent of groundnut production and even less for pulses.
The large pricing disparity is owing to the government's announcement in fiscal 2019 that MSPs will be set at 50% over the all-India weighted average cost of production going forward.
When evaluating MSPs, the agency says three factors must be considered: the increase in production costs, the level of crop procurement at MSP, and crop traded prices.
The scheme, however, is not beneficial to farmers on any of these metrics, according to the agency, because both MSP intakes - which are as low as 47% of the mandi price in the case of cotton and other crops - and prices are never on par with market pricing.
Even the Commission for Agricultural Costs and Prices (CACP) cost of production assessment for this season is inaccurate, according to the report, and is substantially lower than the actual cost by 5% as opposed to the 3% calculated.
The agency estimates that the increase in the cost of production for the preceding Kharif season was substantially higher at 5%, compared to the 3% revealed by CACP, based on ground-level interactions. This was due to a rise in diesel prices (which occurred after the CACP assessment), which influences machine labor, which accounts for 12-13 percent of production costs.
Furthermore, while selling prices for fertilizers were mostly steady due to increased subsidies, pesticide prices increased by 7-8%, which is not completely accounted for in the current MSP revision.
Labour and irrigation have also become more expensive, accounting for 55-60% of total farming costs.
The amount of procurement is the second crucial factor to consider when evaluating MSP because farmers can only benefit from MSP if their crop is mostly, if not entirely, procured at the MSP.
While paddy farmers in the north will gain from the 5% increase in the MSP, cotton farmers should sell in the open market because the cotton MSP is 47% lower than mandi prices in May 2022.
When it comes to oilseeds, the MSP for soybean has increased by 9%, followed by sesame and sunflower, which have increased by 7% and 6%, respectively. Despite the 9% increase in soybean MSP, the price is still 36% lower than the mandi price for May. While mandi prices are likely to fall during the peak arrival season in October-November, they are still expected to be higher than the MSP for cotton and oilseeds, according to the report.
Moong has the biggest MSP increase among pulses, at 7%, followed by Howard at 8%, and ragi at 6% over the previous year.
