Can Minimum Support Price be the Answer to Our Country’s Agricultural Woes?

Photo Courtesy: Krish Dulal

Photo Courtesy: Krish Dulal

Despite being primarily an agricultural country, Nepal’s state of agriculture is dismal. Although almost 70% of the total labor force is engaged in the farming and forestry sector, the share of agriculture to GDP is a mere 33%. Food deficit is a recurring phenomenon as Nepal struggles to produce enough food to meet the growing demand of its citizens. Moreover, according to the Ministry of Finance (MoF), agricultural trade of the country is also in deficit and the deficit has been surging in recent years, leaving millions of people more food insecure than ever. In fact, once a net-exporter of paddy, Nepal now imports the staple crop with a staggering NPR 13 billion worth of paddy imported from India in the first ten months of FY 2015/16.

In such a scenario, it is crucial to uplift the agricultural sector and increase production not just for food self-sufficiency but also for growth and poverty reduction. Certain supply-side intervention on the government front are therefore essential to incentivize farmers to increase output. One such intervention can be through the introduction of Minimum Support Price (MSP).

What is Minimum Support Price?
MSP is a form of market intervention by the government that ensures farmers a guaranteed price as well as an assured market for their produce. Under this policy pricing, the government announces a fixed price for certain crops before the sowing season. If and when the market prices of those crops fall below the fixed price due to various unwarranted reasons, the government will purchase them at their respective MSPs therefore guaranteeing a certain amount of money to the farmers.

Why Minimum Support Price?
Since Nepal is still a developing economy, it is plagued by various market imperfections such as information asymmetry, prevalence of middlemen, etc. that impede prices from getting solely determined by the market. After the wake of liberalization, privatization and globalization, markets around the world are getting more and more integrated, while prices have become more volatile leaving millions of people who earn their livelihood from agriculture more vulnerable to food insecurity. Hence, MSP is an appealing price policy because it not only provides stability of prices, but also results in higher income for farmers, thereby encouraging them to invest more in agriculture.

The Case of India
MSP has been used extensively in India to influence farmers’ decisions since the 1960s. India adopted MSPs as a price support mechanism to induce farmers to adopt the new technology of HYV seeds in the backdrop of food scarcity and price fluctuations. Studies have shown that states like Punjab, Haryana and Andhra Pradesh witnessed manifold increase in production with surpluses after the policy was implemented for the MSP-announced crops. Currently, the Indian government sets prices for 23 different food and non-food crops.

Nepal's MSP Stint
Nepal too had introduced MSP in the Seventh Five Year Plan for Paddy and Wheat. The results however were grim and ineffectual. Firstly, it was found that the government-set prices were below farm-gate prices[1]. Secondly, the announcement was not done before the sowing season, as a result of which farmers were unable to take into consideration MSP’s into their production decisions. Thirdly, the government was not prepared to procure the food grains beyond a certain quota due to inadequate budget and storage facilities. The policy was eventually removed in the FY 1997/98.

What can Nepal do Differently?
In 2012, the government initiated steps to revive the policy of price fixing under the directive of the then prime minister, Baburam Bhattarai. The MSP would be recommended by the Ministry of Agricultural Development (MoAD) and procured by Nepal Food Corporation (NFC). However, even as of  October  2016, there is no movement on the plan and the talks are still on the table while the execution is getting delayed.  

This time around, the government will need to address a few key issues before the implementation of the MSP policy, as identified below.  

i.    Careful examination of the capital requirement and subsequent allocation so that the government is well-prepared to procure the crops post-harvest.
ii.   MSPs should be announced on time for the policy to have desired effects.
iii.  Invest in non-price factors as price alone will not increase agricultural output dramatically. These include:

  • Enabling farmers to deliver their produce at the required Nepal Food Corporation (NFC) depot so that they are not forced to sell at lower prices. Issues such as road connectivity should therefore also be considered.
  • Improved irrigation facilities so that the sector becomes less dependent on the monsoons.
  • Adoption of modern technologies in the farming sector for better yield.
  • Increased investment in research and development on the agriculture sector in Nepal.

Hence, as Nepal is in a dire need of an agricultural revolution, MSP could potentially be one of the answers to Nepal’s agricultural woes if it is implemented. However, it is important to address other domestic infrastructural and technical capacities before proceeding on this front.

[1] The farm gate prices are the prices received by farmers for their produce at the location of farm that doesn’t include the costs of transporting from the farm gate to the nearest market or first point of sale. (FAO)

Sijan Thapa
Sijan has a Bachelor's degree with Honors in Economics from Lady Shri Ram College for Women (University of Delhi). She is involved in economic and policy analysis at NEF.
More articles by Sijan Thapa
Article views: 1355