The debate about instituting a legally binding Minimum Support Price (MSP) for crops is both narrow and counterproductive. While it aims to address farmers’ challenges, it overlooks complexities that can exacerbate rural poverty and destabilise agricultural markets. These include climate-induced production shocks, which pose a greater risk than price volatility, and the need to align agricultural production with changing dietary preferences.
The two best policy instruments to address these are income support and price deficiency payments to ensure stable rural incomes and expanded and decentralised public procurement at market prices for production and consumption diversification.
First, the baseline safety net should be a targeted quasi-Universal Basic Income (q-UBI) for rural households, as the former chief economic advisor, Arvind Subramanian, proposed. This support would extend PM-Kisan beyond cultivators. Setting the q-UBI payment higher than PM-Kisan payouts — perhaps at the average income of a five-acre farmer — will ensure meaningful coverage of price and quantity shocks.
MSP-driven frameworks ignore the reality that rural livelihoods extend beyond cultivators. For example, thousands of rural citizens earn their livelihoods as traders and are the backbone of our agricultural supply chains. An artificially high MSP combined with depressed retail prices undermines their livelihoods. Additionally, focusing only on price stabilisation leaves farmers vulnerable to climate-induced yield shocks.
In addition to q-UBI, price deficiency payments can insulate farmers from extreme price shocks while maintaining market discipline. For instance, when crop prices in a district drop drastically, farmers there could be compensated for a fraction — say 30 per cent of the average loss. This shields farmers from extreme volatility while incentivising market adaptability.
This approach requires a robust market intelligence system, which, though established in some states, remains underdeveloped or absent in others. This mechanism should come into play during extreme fluctuations. Persistently low prices over several seasons must serve as a signal for farmers to switch crops or consider alternative livelihoods.
Second, public procurement must evolve and be rationalised to reflect changing demand patterns. State governments, with central funding, should expand their procurement portfolios to include a broader range of crops for the Public Distribution System (PDS), mid-day meals, and other welfare schemes. To keep consumption subsidies fiscally manageable, the expansion in the scope of products covered should be accompanied by better and narrower targeting of beneficiaries.
Programmes like PM-AASHA already allow for decentralised procurement, but states must take the lead in implementation. The central government should not be held accountable for states failing to operationalise these frameworks effectively. Additionally, states should be held fiscally responsible to minimise wastage. PM-AASHA puts a cap on procurement and incorporates this principle. It can be tailored further to ensure the Centre pays a consumer subsidy only if the procured crops are utilised in welfare programmes.
Concomitantly, the Centre should broaden strategic reserves beyond rice and wheat to include pulses, onions, and other essential crops. This benefits farmers and shields consumers from price shocks in key commodities, as in the case of onions, which have experienced wild price swings in recent years. Unlike the present, however, all public procurement should occur at market prices, not predetermined MSPs. Procurement quantities should be guided by demand conditions and existing inventories to prevent overstocking and wastage. The major shift I am proposing here is that the central and state governments help farmers not by stipulating a minimum price but by being key players in markets. A diversified PDS will lead to a procurement strategy that would stabilise demand, fostering a more resilient food system.
The demand for a legally binding MSP stems from years of ignoring the farmers on various counts such as inadequate crop insurance and suppressed prices due to export restrictions. There is also merit in debating the legal framework for agricultural support. However, by focusing solely on MSP, we risk missing the opportunity to implement a more comprehensive and dynamic policy framework.
The two components of the proposed package represent significant departures from existing systems. However, they are grounded in the infrastructure and experiences gained over the past decade. Admittedly, working out the details will require careful planning and collaboration, but this integrated approach promises a more sustainable and equitable way to support farmers. It safeguards rural livelihoods, fosters dynamic agricultural markets, and aligns policies with future demands.
The writer is assistant professor of International Economics at Johns Hopkins University, USA
