Advantages and Disadvantages of Minimum Support Price Scheme

India is a nation where farming comprises one of the major sources of income. Growing up one is always taught that the farmer is the main contributor of the economy. Then why is it that this contributor is in desperate need of help from the government. If one watches the daily news, one fails to understand that, if the promises made by every government before the elections depict a really true promise or is it a mere attempt to tap into a specific vote bank of the farmers. It is said that the current chief minister of the heavily drought struck state Telangana, Mr. K Chandrashekhar Rao has requested various banks to waive of loans of farmers but some people consider it a mere attempt to collect votes of farmers in the wake of elections. To consider the other side of the coin, one must consider the consequences of this waive off, the banks that lends loans to these farmers suffer losses to the tune of hundreds of crore rupees and increases the rate of defaulters to their burden. The banks already provide loans to farmers at a lower rate of interest which gives them a very small margin to earn any profit on these loans.

The concept of loan waive off to farmers was started by the UPA government first in 2008. The scheme by the name of Agricultural debit wave off was a 600 billion rupee package scheme. The main aim of this scheme was to waive loans of small and medium scale farmers. This move was sharply criticised by the opposition parties as well as economists and bankers. This makes us wonder what can be done to save both the farmers and the banks for a long period of time from this trouble.

CONCEPT

One such solution is Minimum Support Price (MSP). Minimum Support Price is a concept which helps the government by intervening with the sharply falling prices of any commodity in the market. The main objective of Minimum Support Price (MSP) is to avoid losses of farmers by helping them regulate a minimum level of price at which a commodity can be purchased by the agents who purchase from farmers or which the government offers to buy. Minimum Support Price (MSP) system sets up a floor price to a commodity which gives a minimum price below which it cannot be purchased by the farmers. Let’s see some advantages and dis-advantages of the Minimum Support Price (MSP) system if adopted by the government as an alternative for loan waiver schemes.

ADVANTAGES

Price volatility

The system of Minimum Support Price (MSP) system acts as a tool for the government to control sharp fall and rise in the prices of any crops. This helps keep a floor price which does not let the prices fall below a certain point. This can also be used as a tool to control inflation by way of rising prices.

Surety of minimum prices

The concept of Minimum Support Price (MSP) system acts as a surety to farmers so that their crops get the fair amount for their produce and helps them sustain their losses and does not affect them drastically. This helps them cover the minimum amount expenses in cultivating the crops and pay of the debts which they have.

Control crops short in supply

Minimum Support Price (MSP) also helps government control the growth of crops which are low in production. The government can offer more price support for these crops so that more and more farmers are tempted to grow these crops with an assurance that they will recover a certain amount from the government with guarantee.

Fair price shops

The government can use these crops to be sold at government fair price shops at a price lower than market rate. This will also help the government in making these crops available to the below poverty line people at a lower price. This will also help the government recover some amount and reduce the losses of the government.

Load on banks

The financial system plays a vital role in the smooth functioning of the Indian economy. It is very important that these institutions do not fail as they are majorly run on funds procured by public at large. In case of waive off of loans these create a heavy burden on the banks/financial institutions. These waive offs often lead to foreclosure of banks and specially the small agricultural institutions.

Disadvantages

Effect on small and medium scale farmers

According to studies, most of the drought affected farmers are small and medium scale farmers. These farmers do not procure loans from financial institutions. They prefer loans from private money lenders which are not covered under these schemes. In fact farmers who produce on large scale are often seen getting rid of their debt with the help of these schemes.

Killing of competition

Any interference by the government kills the competition. This affects the agents who procure the crops at lower prices and sell them at higher prices and earn profits. This mainly disturbs the working of people who sell these outputs from farmers into the open market.

Conclusion

In my view, Minimum Support Price (MSP) has more advantages than dis-advantages and if managed properly it can be used by the government as a powerful tool in stabilising the economy. This will mainly help reduce the burden on financial institutions as banks are mainly run of funds procured by the public at large. The produce purchased by the government can also be sold at fair price shops to people below poverty line. This will help reduce though not completely but partially the burden on the government in respect of recovering the prices promised to the farmers.