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Tuesday, August 16, 2022

Explained: The cost of guaranteed minimum support price (MSP)

Apart from repeal of farm laws, farmers are demanding guaranteed minimum support prices, which have no legal backing. A look at what the implications would be if the govt did provide the guarantee

Written by Harish Damodaran , Edited by Explained Desk | New Delhi |
Updated: January 30, 2021 10:59:57 am
The total value of India’s paddy production works out to Rs 3.2 lakh crore, going by MSP. (Source: Twitter)

Farmer unions protesting on Delhi’s borders are raising two fundamental demands. The first is for repealing the three agricultural reform laws enacted by the Centre. The second is to provide legal guarantee for the minimum support prices (MSPs) that the Centre declares for various crops every year. Currently, there is no statutory backing for these prices or any law mandating their implementation. What are the implications if the government were to accept the farmer unions’ demand?

How can MSP be made legally binding?

There are two ways it can be done.

The first is to force private buyers to pay it. In this case, no crop can be purchased below the MSP, which would also act as the floor price for bidding in mandi auctions. There’s already a precedent: In sugarcane, mills are required by law to pay growers the Centre’s “fair and remunerative price” – Uttar Pradesh and Haryana fix even higher “state advised prices” – within 14 days of supply. In no other crop is the compulsion to pay the government-announced MSP thrust on the private trade/industry.

The second route is, of course, the government itself buying the entire crop that farmers offer at the MSP. In 2019-20, government agencies — Food Corporation of India, National Agricultural Cooperative Marketing Federation of India and Cotton Corporation of India (CCI) – procured 77.34 million tonnes (mt) of paddy and 38.99 mt of wheat, worth roughly Rs 140,834 crore and Rs 75,060 crore at their respective MSPs. Further, they purchased 105.23 lakh bales of cotton (MSP value of Rs 28,202 crore in terms of raw un-ginned kapas), 2.1 mt of chana or chickpea (Rs 10,238 crore), 0.7 mt each of arhar or pigeon-pea (Rs 4,176 crore) and groundnut (Rs 3,614 crore), 0.8 mt of rapeseed-mustard (Rs 3,540 crore) and 0.1 mt of moong or green gram (Rs 987 crore).

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But how much of farmers’ produce can the government buy at MSP?

The MSP is now applicable on 23 farm commodities: 7 cereals (paddy, wheat, maize, bajra, jowar, ragi and barley), 5 pulses (chana, arhar, moong, urad and masur), 7 oilseeds (groundnut, soyabean, rapeseed-mustard, sesamum, sunflower, nigerseed and safflower) and 4 commercial crops (sugarcane, cotton, copra and raw jute).

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The chart shows that the MSP value of the total production of the 23 crops worked out to around Rs 10.78 lakh crore in 2019-20. Not all this produce, however, is marketed. Farmers retain part of it for self-consumption, seed for the next season’s sowing and also for feeding their animals. The marketed surplus ratio for different crops is estimated to range from below 50% for ragi and 65-70% for bajra (pearl-millet) and jowar (sorghum) to 75% for wheat, 80% for paddy, 85% for sugarcane, 90% for most pulses, and 95%-plus for cotton, jute, soyabean and sunflower. Taking an average of 75% would yield a number of just over Rs 8 lakh crore. This is the MSP value of production that is the marketable surplus — which farmers actually sell.

So, is this the money that the government would have to spend in order to ensure farmers get MSP?


Not really. To start with, one must exclude sugarcane from the calculations. The onus for paying cane MSP, as earlier pointed out, lies on sugar mills and not the government. Secondly, the government is already procuring many crops – especially paddy, wheat, cotton and also pulses and oilseeds. The combined MSP value of the procured quantities of these would have exceeded Rs 2.7 lakh crore in 2019-20.

Thirdly, government agencies don’t have to buy every single grain that comes to the market. Mopping up even a quarter or third of the market arrivals is usually enough to lift prices. Take cotton, where CCI has so far procured 87.85 lakh bales out of the current year’s (October 2020-September 2021) projected crop of 358.50 lakh bales. The state-owned corporation’s intervention has led to open market prices crossing the MSP for kapas in most mandis, thereby not necessitating further official purchases.

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Fourth, the crop bought on government account also gets sold. While such sales in wheat and paddy – which are distributed at super-subsidised rates under the National Food Security Act – entail heavy losses, those are far less in the remaining MSP crops. The revenues realised from sales would partly offset the expenditures from MSP procurement.


All in all, the additional fiscal outgo, from the government undertaking the maximum required procurement for guaranteeing MSP to farmers, may not be more than Rs 1-1.5 lakh crore per year.

That isn’t much, right?

The government undertaking to buy at MSP is definitely better than forcing private players. If the record of sugar mills – their inability to pay farmers on time despite statutory provisions of the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act – is any guide, no trader or processer will purchase crops at prices beyond what the market supply-demand dynamics permit. Their going out of business would ultimately hurt farmers most.

However, even assured government MSP-based procurement is fraught with problems. The coverage of MSPs today does not extend to fruits, vegetables and livestock products that together have a 45% share in the gross value of output of India’s agriculture, forestry and fishing sector. The value of milk and milk products alone is more than that of all cereals and pulses combined.

Extending MSP to all farm produce and guaranteeing it through law is hugely challenging, fiscally and otherwise. It also explains why economists increasingly are in favour of guaranteeing minimum “incomes” rather than “prices” to farmers. One way to achieve that is via direct cash transfers either on a flat per-acre (as in the Telangana government’s Rythu Bandhu scheme) or per-farm household (the Centre’s Pradhan Mantri Kisan Samman Nidhi) basis.

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First published on: 23-01-2021 at 04:15:50 am
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