Wednesday, Nov 30, 2022

MSP for all crops is fiscally unfeasible

🔴 Ashok Gulati, Shweta Saini writes: It may be better to use an income policy to directly transfer money into farmers’ accounts.

The legality of MSP means that no one is allowed to buy a crop below its MSP. If this demand is accepted it will not only mess up the economy but will ultimately turn out to be anti-farmer. (Illustration: C R Sasikumar)

Several countries around the world, especially the G-20, support their agriculture. Research tells us that the best way to support agriculture in a sustainable and competitive manner is to invest in agri-R&D, agricultural-extension systems, and connect farmers to lucrative markets, domestic and external, by building efficient value chains. Giving farmers their right to choose the best technologies and the best markets is fundamental to the robust functioning of agri-systems and augmenting farmers’ incomes.

But in a democratic system, policies are not always framed on a scientific basis. They are often influenced by various lobbies, including politicians who at the time of elections offer freebies like free electricity, and farm loan waivers as “doles for votes”. This short sightedness results in sub-optimal or even irrational policy choices, which, in due course, harm the economy, environment, and even farmers.

Let us discuss here the case of minimum support prices (MSP), which many political parties are demanding to make a legal instrument. The legality of MSP means that no one is allowed to buy a crop below its MSP. If this demand is accepted it will not only mess up the economy but will ultimately turn out to be anti-farmer. The reason is simple: It ignores the basic logic that prices are largely decided by the overall demand and supply. In the case of surplus, which usually happens at harvest time, prices fall to clear the market. If MSP is above that market clearing price, no one from the private sector will be willing to buy. In that case, the government will have to become the buyer of last resort, else farmers will be left high and dry with no buyers for their produce, making farmers worse-off. The issue is how much the government can buy, of how many commodities, and what will be its cost.

As of today, the government declares MSP for 23 crops: Seven cereals (paddy, wheat, maize, bajra, sorghum, ragi and barley), five pulses (tur, moong, chana, urad and masur), seven oilseeds (soybean, groundnut, rapeseed-mustard, sesamum, safflower, sunflower and nigerseed) and four commercial crops (sugarcane, cotton, jute and copra). The main procurement, however, happens largely for rice and wheat to feed the public distribution system (PDS). The PDS issue prices of rice and wheat are subsidised by more than 90 per cent of their economic cost to the government. In 2020-21, the food subsidy bill was almost 30 per cent of the net tax revenue of the central government, reflecting clearly a huge consumer-bias in the system. Unless this PDS is reformed either by restricting this to say the bottom 30 per cent of the population, or raising the issue prices to say half the economic cost of rice and wheat, giving a better deal to farmers is likely to blow up the fiscal position of the central government.

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It may also be remembered that the MSP regime had its genesis in 1965 when India was hugely short of basic staples and living in a “ship-to-mouth” situation. It was an indicative price (not a legal price) and procurement of rice and wheat was done to support farmers when they were adopting new seeds (HYV technology) and domestic procurement was to feed the PDS. But now with granaries overflowing with rice and wheat, there is a need to rethink and redesign the procurement policy. In the crop year 2020-21, about 60 million metric tonnes (MMTs) of rice and 43 MMTs of wheat were procured by the Food Corporation of India (FCI) and NAFED procured about 0.66 MMTs of pulses.

Even after procuring more than 50 per cent of the marketed surplus of rice and wheat, the market prices of rice and wheat remained below MSP in several states. For example, in November 2020, market prices of paddy in Chhattisgarh were below the MSP by more than Rs 300/quintal; in UP, the gap was about Rs 102/quintal. This situation prevailed widely in Bihar, Jharkhand, Assam and many eastern states. Similarly, in wheat, the crop sold below the MSP in UP and MP, the largest wheat producing states. Possibly, one of the reasons behind market prices hovering below MSP is the large leakage from the PDS suppressing market prices.

If this is the case of rice and wheat, where even after procuring more than 50 per cent of the marketed surplus prices stayed below MSP, extending the system to cover 23 crops under MSP will need much deeper thought.


According to our back-of-the-envelope calculations, assuming that only 10 per cent of the production of remaining crops (excluding sugarcane) is procured, it will cost the government about Rs 5.4 lakh crore annually to procure these other MSP crops. This cost is estimated on the basis of economic costs of operation that are usually about 30 per cent higher than the MSP (in case of rice and wheat it is 40 per cent). But it appears that despite this, market prices may stay below MSP, especially during the harvest time. It also raises the question why only these MSP crops, why not other agri-produce, say milk, the value of which is more than the value of rice, wheat and sugarcane combined.

One argument that is floated is that instead of physical procurement, one may use price deficiency payments (PDP), implying that the government pays to farmers the gap between the market price and MSP, whenever market prices are below MSP.

We know very well that Madhya Pradesh adopted this scheme (Bhavantar Bhugtan Yojana) in kharif 2017 for eight crops (maize, tur, urad, moong, soybean, groundnut, sesamum, and nigerseed) but had to give up the very next season as traders gamed it, widening the gap between market prices and MSP, and benefited massively from this scheme, while the government incurred heavy expenditure.


What’s the way out to give a better deal to farmers? It may be better to use an income policy on a per hectare basis to directly transfer money into farmers’ accounts without distorting markets through higher MSPs or PDPs. This can be improvised by better identification of tenants and owners through transparency in land records. There is no easy substitute to “getting the markets right”.

This column first appeared in the print edition on December 20, 2021 under the title ‘How to help the farmer’. Gulati is Infosys Chair Professor for Agriculture at ICRIER and Saini is Senior (visiting) Fellow, ICRIER

First published on: 20-12-2021 at 03:34:47 am
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