More about MSP and farm economy


The Modi government, earlier this week, increased the MSP of Rabi crops to ensure remunerative prices to the growers for their produce, including a hike in MSP of Wheat by Rs 40 to Rs 2015 per quintal and for Mustard seed by Rs 400 to Rs 5050 per quintal for the current crop year. It needs to be noted here that the cost of production of Wheat is estimated at Rs 1008 per quintal. Hence,the MSP of Rs 2015 per quintal, for Wheat, should hold the Farmers in good stead as it is far higher than the production cost. Minimum support price (MSP), is the rate at which the government buys the produce from farmers. Currently, the MSP is fixed for 23 crops grown in both Kharif and Rabi seasons— 7 cereals, 6 pulses,7 oilseeds, and 4 commercial crops.

Minimum Support Price (MSP) is a form of market intervention by the government of India to insure agricultural producers against any sharp fall in farm prices and, is announced on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP). The Minimum Support Prices to Farmers, are guaranteed prices for their produce from the government. The major objectives are to support the farmers from distress sales and to procure food grains for public distribution. In case the market price for the commodity falls below the announced MSP due to bumper production and glut in the market, government agencies usually purchase a major quantity offered by the Farmers at the announced minimum price.

The Modi government has procured a record of over 43 million tonnes of Wheat during the 2021-22 Rabi marketing season (RMS).

The support price of Barley has been hiked by Rs 35 to Rs 1635 per quintal. Among pulses, the MSP for Gram has been increased by Rs 130 to Rs 5230 per quintal while that for Lentil (Masur) has been hiked by Rs 400 to Rs 5500 per quintal. In the case of oilseeds, the government has increased the MSP for Mustard seed by Rs 400 to Rs 5050 per quintal for the ongoing crop year.

The MSP for Safflower has been raised by Rs 114 to Rs 5441 per quintal. The expected returns to farmers over their cost of production are estimated to be highest in the case of Wheat and Mustard seed (100% each), followed by Lentil (79%), Gram (74% ); Barley (60%), and Safflower (50%).

Many Farmers in many water deficit States produce Paddy and Wheat, only to benefit from MSP, even though productivity and yield per hectare would be higher, if they grew other crops. MSP was started in 1965 when India was a food-deficit nation. But India is a food surplus economy today, with agriculture production hitting a record high of over 303 million tonnes, in FY2020-21. Despite this, the Modi government has been handholding farmers, as Prime Minister Modi has always cared for India’s “Annadata” and rightfully so.

In the last three decades, world milk production has increased by more than 59%, from 530 million tonnes in 1988 to 843 million tonnes in 2018. India is the world’s largest milk producer, with 22% of global production followed by the United States of America and China. India has over 80 million dairy farms that produce more milk than the entire European Union. Under the milk revolution, which gathered huge momentum under the Modi government, milk production in India today is 50% higher than that in the USA and almost 300% higher than that in China. Milk has never been a part of MSP so that should tell a lot about the relevance of MSP!

Be that as it may, the Modi government in 2018 increased the MSP by 1.5 times the production cost, which is the chief determinant of MSP today. This is based on the recommendations of the Swaminathan Commission and National Commission of Farmers,2006, which Congress clearly failed to implement for eight long years between 2006 and 2014 before it was ousted. Shanta Kumar, recently said, when asked about the new Farm legislation and MSP— “On MSP, the Modi government has clarified that it will stay, but the question we (the committee) have raised is that MSP only relates to 6% of big, elite farmers who sell their crop in Mandis. Over 86% are small farmers who don’t go to the Mandi to sell their produce, and the new Bills will give them strength to sell outside the Mandi at better prices”.

The total value of all agriculture output was around Rs 40 lakh crore in FY20 while the total value of MSP operations was around Rs 2.5 lakh crore, corroborating the argument by Shanta Kumar, that if only 6.25% of the agri produce is MSP driven, then why this hue and cry about MSP? Clearly, the entire MSP-related controversy is a needless one, that is in large measure, a manufactured controversy by an electorally debilitated opposition that is running out of issues to fret and fume about. Prime Minister Narendra Modi has categorically assured farmers that his government will continue with MSP. Hence any apprehensions on this front are not required.

Indeed, MSP in the past skewed the agrarian economy towards a handful of crops and wrought havoc on farm productivity and soil quality. Higher prices for Wheat and Rice, resulted in Farmers in States like Haryana and Punjab growing water-intensive crops that immensely depleted the water table. Nearly 80% of the land in Punjab was over-exploited and the number was around 50% in the case of Haryana. The open-ended system of procurement by FCI ensures that it has Rs 1.5 lakh crore worth of extra foodgrain in its godowns, which often gets wasted if there is a bumper crop but not enough, matching demand. However, this wastage will get curtailed significantly going forward under the new agrarian structure once the new Farm legislation brought in by the Modi government is put to work.

Let the truth be told— while 46% of India’s farm output is not crops—it comprises Milk, Fishing, Forestry, Fruit and Vegetables (F&V).In fact, the production of F&V is greater than that of cereals, but F&V as a segment, gets no MSP support, nor does milk production. Hence, the flawed argument that MSP is the solution to every agri problem is absolutely wrong. Despite no MSP support, the total value of annual milk production in India is anywhere between 2x-3x higher than that of Paddy, Wheat, and Sugarcane production, all put together.

The agitation against the three Farm laws brought in by the Modi government is increasingly being driven by vested interests. With 3% Mandi taxes, Punjab collected Rs 1750 crore by way of mandi taxes in FY20 and a similar amount by way of a rural development cess (RDC). Interestingly, Arhatiyas or middlemen earned a commission of over Rs 1600 crore in FY20! If the government’s APMC reforms result in alternative markets getting created and farmers are able to sell directly to buyers, the Arhatiya commissions will get impacted and that is precisely why middlemen in the guise of farmers, have been trying to blockade borders adjoining, India’s national capital.

While the Congress party is against the Farm Laws today, in its 2019 manifesto, it had promised to abolish APMCs.Bhupinder Singh Hooda wanted APMCs to be dismantled when he was the Chief Minister of Haryana in 2013 and that is precisely what Sharad Pawar wanted too, when he was the Union Agriculture minister under a Congress-led regime in 2010. The hypocrisy of the Congress is further established by the fact that while it is opposing the Modi government’s Farm bills pertaining to Contract Farming today, it had no problems with Contract Farming way back in 2006 in Maharashtra when Vilasrao Deshmukh of Congress was the chief minister. Again in 2003, when Digvijay Singh of the Congress was the chief minister of Madhya Pradesh, Contract Farming was permitted. The biggest testimony that the Farmer protests are being politicised is the fact that while some groups have a problem with Contract Farming under the new farm laws, these groups have never bothered to even raise their little finger against the Contract Farming practice in Maize, Barley, Sunflower and some varieties of Wheat that has been very much in vogue in the Congress-ruled state of Punjab for the last few years.

MSPs are not being phased out despite various challenges, because the Modi government wants to stand in solidarity with our farmers, and rightfully so given its commitment to double farmers’ income by 2022. That said, about 70% of Punjab’s Wheat output is procured by government agencies and this number is about 85% for Paddy. Contrast this with the fact that just around 10% of UP’s Wheat is procured at MSP, while UP produces double the Wheat Punjab does. While Mandi prices are typically 20-50% below the MSP for most crops, the Farmers from Punjab are almost completely insulated from any market-risk and hence, Farmers from Punjab have no reasons to complain whatsoever.

A related point worth keeping in mind is that even with the MSP-based procurement intact, Punjab’s agri-GDP is rapidly slowing. Agri-GDP grew by 5.7% a year between 1971-72 and 1985-86 versus India’s 2.3%. Between 1986-87 to 2004-05, Punjab’s agri-GDP grew at less than 3%, and post-2005, Punjab’s agri GDP fell even further to just 1.9% versus India’s average of over 3.5%. The reason for this is that MSPs are often already higher than global prices for Wheat and Rice. Hence market prices or MSPs cannot rise beyond a point for these two crops. Other Cash crops and livestock that yield significantly higher returns are not being cultivated by farmers in Punjab, while Farmers in other states are doing so, thereby dragging down Punjab’s agri-GDP number.

Even today, each farming household in Punjab gets Rs 1.2 lakh worth of subsidies related to water, electricity, fertilizers, interest subvention, and the like. The Farm Bills promise Farmers the freedom to sell wherever, and to whomever, they please. This corrects the restrictive trade and marketing policies followed so far. The economic rationale of all these bills is to provide greater choice and freedom to farmers to sell their produce and buyers to buy and store, thereby creating competition in agricultural marketing. This competition is expected to help build more efficient value chains in agriculture by reducing marketing costs, enabling better price discovery, improving price realisation for farmers, and yet reducing the price paid by consumers. It will also encourage private investment in storage and thus reduce wastages, and help contain seasonal price volatility.

MSP is an indicative price and does not necessarily lead to Farmers being better off all the time, as the final price is still driven by the market. In the case of rice, the coefficient is around 0.6 and hence the increase of, say, 10% would not give a commensurate return to the farmer as the non-procurement quantity, which would be of higher grades, would not be linked with this factor and is between 60-65% of total production. Therefore, raising MSPs will not necessarily lead to higher incomes for Farmers. As a corollary, the fear of higher inflation would also be misplaced, as if prices are driven by market factors. It needs to be appreciated that MSP is an indicative price that works when the government steps in to buy the product. It does not necessarily lead to farmers being better off all the time as the final price is still driven by the market. To overplay the role of MSP in delivering benefits to farmers may be an exaggeration, just as overstating the inflationary impact.

MSP has always been an administrative mechanism and never a legislative one. How will MSP be ensured in private transactions? Well, private trade will be above the rate of MSP. That is the whole point. The farmer will obviously engage with private traders only when he gets rates that are better than MSP. If the farmer gets less than MSP in private trade, the farmer can always opt for selling his produce in the APMC Mandi in any case and pocket the difference between market price and MSP.

Has the Modi government strengthened MSP? Of course, yes. The numbers speak for themselves. For instance, Congress led UPA between 2009-14 purchased only a measly 1.52 lakh metric tonnes (LMT) of pulses at MSP. BJP led NDA between 2014-19 purchased 76.85 LMT of pulses at MSP. For oilseeds, numbers are 3.65 LMT under UPA and 30.17 LMT by the BJP- led Modi government. In line with Prime Minister Narendra Modi’s stated goal of empowering India’s Farm economy concerted efforts were made over the last seven years to realign MSPs in favour of Oilseeds, Pulses, and Coarse Cereals, to encourage farmers to shift to larger areas under these crops and adopt best technologies and farm practices. Crop diversification, to correct demand-supply imbalances, is being encouraged, earnestly.

The Umbrella Scheme “Pradhan Mantri Annadata Aay SanraksHan Abhiyan’ (PM-AASHA) announced by the Modi government in 2018, will aid in providing a remunerative return to farmers for their produce. The Umbrella Scheme consists of three sub-schemes i.e. Price Support Scheme (PSS), Price Deficiency Payment Scheme (PDPS), and Private Procurement & Stockist Scheme (PPSS). The success of MSP depends on the wider procurement of crops. The PSS, market assurance scheme (MAS) and PDPS, to ensure efficient procurement, are key steps undertaken by the Modi government for ensuring Farmers are duly taken care of.

The writer is an economist, national spokesperson of BJP, and bestselling author of ‘Truth & Dare: The Modi Dynamic’. The views expressed are personal.