MAINS Current Affairs includes MSP in India: Measurement Gaps, Structural Limits & Need for Reform & Global Economic Risks and India’s Resilience

ECONOMY

1. MSP in India: Measurement Gaps, Structural Limits & Need for Reform

Context

• Concerns have emerged that outdated cost calculations and weak procurement systems are reducing the effectiveness of Minimum Support Price (MSP), leading to calls for reform.

About Minimum Support Price (MSP)

• MSP is the minimum assured price at which the government procures crops from farmers to protect them from price volatility and ensure food security.
• It was introduced during the Green Revolution (1966–67) following the establishment of the Agricultural Prices Commission (now CACP).

Coverage:

• 22 crops (14 Kharif, 6 Rabi, 2 commercial crops)
• Plus Fair and Remunerative Price (FRP) for sugarcane

Objectives:

• Ensure remunerative returns to farmers
• Prevent distress sales
• Maintain food security

Institutional Framework

• Commission for Agricultural Costs and Prices (CACP):
  • Recommends MSP based on production costs, demand-supply, and price trends
• Cabinet Committee on Economic Affairs (CCEA):
  • Final authority approving MSP
• MSP follows a cost-plus approach, targeting at least 50% margin over A2+FL cost

Cost Concepts in MSP

• A2: Actual paid-out expenses (inputs, labour, fuel, etc.)
• A2 + FL: Includes imputed family labour
• C2: Comprehensive cost (A2+FL + rent of land + interest on capital)
• Cost data is generated through the Comprehensive Scheme for Cost of Cultivation under the Directorate of Economics & Statistics.

Limitations in MSP Framework

• Time Lag in Cost Estimation:
  • Uses data that is often 2–3 years old, leading to underestimation during inflationary periods
  • Real-time costs may be significantly higher (20–30% in some cases)
• Changing Mechanisation Patterns:
  • Shift from owned machinery to service-based models is not fully captured in surveys
• Limited Procurement Coverage:
  • Effective procurement largely restricted to rice and wheat through agencies like FCI
  • Many farmers sell below MSP for other crops
• Distorted Cropping Patterns:
  • Procurement incentives encourage rice-wheat monoculture in states like Punjab and Haryana
  • Diversification seen in states with better market systems

MSP as a Structural Issue

• The problem is not just pricing but also:
  • Measurement gaps (inaccurate cost estimation)
  • Transmission failures (weak procurement reach)

Outcome:

• Works relatively well in stable conditions
• Fails to ensure profitability during volatile periods

Reforming MSP System

Short-Term Measures:

• Update cost calculations using real-time data
• Index MSP to volatile inputs like fuel and fertilisers
• Focus procurement reforms in pulses and oilseeds

Medium-Term Measures:

• Increase sampling frequency and regional coverage
• Use digital tools and remote sensing for cost tracking

Fiscal Impact:

• Likely manageable compared to benefits such as improved farmer incomes and policy credibility

Recent Government Initiatives

• PM-AASHA Scheme:
  • Ensures MSP implementation through procurement (PSS)
• Pulse Self-Sufficiency Target:
  • 100% procurement of key pulses (tur, urad, masoor) till 2028–29
• Digital Platforms:
  • e-Samridhi and e-Samyukti improve transparency and efficiency

Conclusion

• MSP has been crucial for farmer protection, price stability, and food security.
• However, evolving agricultural conditions demand modernised cost estimation and stronger procurement mechanisms.

Way Forward:

• Adopt a data-driven and adaptive MSP framework
• Strengthen procurement and market linkages
• Ensure gradual, non-disruptive reforms

ECONOMY

2. Global Economic Risks and India’s Resilience

Context

• The Governor of the Reserve Bank of India (RBI) recently highlighted that geo-economic fragmentation (GEF)—driven by tariffs, trade barriers, and strategic policies—is reshaping global supply chains and disrupting capital flows.

What is Geo-Economic Fragmentation (GEF)?

• GEF refers to a policy-driven reversal of global economic integration, influenced by geopolitical and security considerations rather than market forces.
• It involves disruptions across key channels such as:
  • Trade
  • Capital flows
  • Migration
  • Technology diffusion
• Unlike natural de-globalisation, GEF is state-led, arising from measures like sanctions, export controls, and industrial subsidies.

Implications of Geo-Economic Fragmentation

1. Financial and Market Risks

• Increased volatility in global financial markets
• Risk of systemic crises similar to past financial shocks
• Asset price bubbles, especially in technology sectors
• Rapid growth of private credit markets with limited regulation

2. Macroeconomic Vulnerabilities

• Rising public debt due to post-pandemic fiscal expansion
• Delays in fiscal consolidation
• Increased defence spending due to geopolitical tensions

3. External Sector Pressures

• Volatile energy prices and currency fluctuations
• Supply chain disruptions (shift toward security-driven production, e.g., China+1 strategy)
• Fragmentation of financial flows and reduced capital mobility

4. Growth and Structural Challenges

• Slower global growth due to tight monetary policies
• India’s growth moderating (from ~8.2% average to ~6.5–7%)
• Challenges in financial market depth and participation

5. Technology Risks (AI)

• Uncertain business sustainability
• Uneven diffusion across economies
• Job displacement and skill mismatches

India’s Resilience Amid GEF

• Diversified Trade Structure: Reduces dependence on specific regions
• Strong Forex Reserves: Around 11 months of import cover
• Manageable CAD: External imbalance remains under control
• Robust Capital Flows: Continued FDI inflows, especially in finance and technology
• Growth Drivers:
  • Strong domestic consumption
  • Public capital expenditure
  • Crowding-in of private investment

Policy Responses & Way Forward

Global Level:

• Strengthen multilateral cooperation (IMF, WTO reforms)
• Promote dialogue to manage fragmentation

India’s Strategy:

• Maintain macroeconomic stability
• Improve ease of doing business
• Focus on inclusive and sustainable growth

RBI’s Role:

• Monitor systemic risks
• Ensure financial stability
• Implement timely policy interventions

Financial Market Reforms:

• Deepen government securities market
• Diversify derivatives for better risk management
• Enhance participation in forex markets
• Develop credit derivatives
• Strengthen role of banks and primary dealers as market-makers
• Improve global integration, transparency, and ethical conduct

Conclusion

• Geo-economic fragmentation presents significant global risks, but India’s strong macroeconomic fundamentals and diversified economy provide resilience.
• Sustained reforms, financial market development, and global cooperation will be key to navigating this evolving landscape.

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