State govts boost farmer incentives amid concerns over fiscal strain

States are topping up PM-KISAN disbursement with own allocation to keep their poll promises. But can a rise in direct benefit transfer and bonus over MSP go hand in hand? Sanjeeb Mukherjee writes

Many state governments over the past few weeks have announced incentives for farmers either by topping up the Centre’s PM-KISAN disbursement with their own allocation, benefits of cultivation per hectare, or a bonus on minimum support price (MSP). 

While most of the announcements have been part of election manifestos, the increase is bound to put a greater burden on their resources. In Madhya Pradesh, the Cabinet recently approved an extra incentive of ₹4,000 per hectare for paddy growers, which would cost the state around ₹480 crore.

  The state has been topping up the PM-KISAN allocation with an extra ₹6,000 per annum for the past few years.

Madhya Pradesh also announced a special bonus of ₹125 per quintal for wheat growers, which would take the purchase price in the state to around ₹2,600 per quintal. The additional bonus is meant to boost the state’s purchases of wheat. The state has targeted buying around 8 million tonnes of grains from farmers in FY26.

  In its latest Budget, Rajasthan announced raising the PM-KISAN disbursement to ₹9,000 per annum by topping up the Centre’s ₹6,000 per farmer. It too has announced a wheat bonus of ₹150 per quintal.

  In Chhattisgarh, the Vishnu Deo Sai government has announced the ₹10,000 crore Krishak Unnati Yojana, under which it gives an input subsidy of around ₹19,257 per acre. This also includes a bonus on paddy purchase.

  In Odisha, the Mohan Charan Majhi government has proposed an allocation of ₹2,020 crore for 2025-26 under CM-KISAN for timely financial assistance and input support to farmers in the state. Under the scheme, eligible small and marginal farmers in both rural and urban areas will receive ₹4,000 per annum for two cropping seasons under CM KISAN and ₹6,000 per annum (for 3 quadrimester) under the PM KISAN scheme, totalling ₹10,000 per annum from both the schemes.

  That apart, for livelihood support for landless agricultural households under CM KISAN, a financial assistance of ₹12,500 is being provided in three instalments. In addition, the state government has enhanced allocation for the Samrudh Krushak Yojana from ₹5,000 crore to ₹6,000 crore in the FY26 Budget. Under the scheme, the state promises to procure paddy at ₹3,100 per quintal, as against the existing MSP of ₹2,300 per quintal (for common-grade paddy).

  Other states too have been adopting the same approach of enhancing the direct benefit transfer (DBT) amount from their own resources, along with announcing some additional payouts in the form of bonus on procurement as well.

  Most of these additional payouts are restricted to procuring wheat and paddy. 

While these additional bonuses tend to keep the rise in prices of grains elevated, they restrict any meaningful move towards diversifying from wheat and rice to more in-demand crops such as pulses, oilseeds and horticulture.

  The burden on the exchequer is all too pervasive.

  For long economists have debated three main methods of ensuring that farmers’ incomes are secured and the burden on the exchequer is minimal.

  The approaches range from enhancing the scope for direct procurement at MSP, to DBT using the PM-KISAN platform, to deficiency-price payment to compensate for the fall in prices below MSP.

  Among the three broad approaches, the first two have financial implications for the exchequer along with problems of storing the procured commodity.

  A recent article by C S C Sekhar, professor at the Institute of Economic Growth and former honorary director, Agricultural Economics Research Centre, Delhi University, shows nationally this expenditure ranges from ₹2,65,469 crore per annum to ₹3,40,091 crore per annum if a combination of MSP-based procurement and deficiency price payment is adopted.

  The analysis is based on 2019-20 prices and assumes only 30 per cent of the marketable surplus is procured by the government at MSP while for the balance a deficiency price is paid.

  For calculating deficiency-price payments, it assumed two scenarios: The first is when prices fall below 10 per cent of MSP and the second is when they fall 20 per cent below MSP.

  For computing the cost of public procurement, first the crop-wise subsidy per unit has been calculated as the difference between the economic cost (EC) of the crop and its central issue price (CIP).

  The EC includes procurement price plus procurement incidentals and distribution cost.

  The CIP is the price at which the consumer buys through the public distribution system. The prices for rice and wheat are in accordance with the National Food Security Act.

  For other crops, the CIP is assumed to be 50 per cent of either the MSP or the economic cost.

In the second step, the expected marketed surplus for each crop is multiplied by the respective subsidy per unit to obtain the subsidy cost of the crop. The subsidy cost is then computed by aggregating the subsidy cost of all the crops.

  The exercise is done for all 23 crops covered by MSP at 2019-20 levels. “These expenditures are steep indeed and to get a sense of the magnitude of numbers, we look at capital expenditure investment in agriculture in 2018-19 which was around ₹3,06,749 crore at 2011-12 prices,” the paper said.

  The paper suggests a third alternative, which gives a per hectare per annum benefit to farmers, estimated at around ₹19,875 per annum, going up to ₹25,980 if family labour is included.

  The average production cost in 2017-20 for 14 crops for which MSP is declared has been used for this calculation while the latest available data on landholding is from the agriculture census of 2015-16.

  The current annual disbursement from the Centre for PM-KISAN is way below this amount at ₹6,000.

  The paper says if the fiscal space is limited the Centre can consider providing half the amount, which is around ₹1,44,815 crore if the payout per annum is close to ₹20,000 per farm and ₹1,89,297 crore if the per annum payout is around ₹25,000 per farm.

  “As can be seen in absolute terms, as a percentage of agriculture GDP and aggregate GDP, the expenditure on direct income transfer is much lower than expenditure under procurement and direct payment system. This expenditure will be even lower if rice and wheat farmers are excluded as they have already benefited from the MSP system,” the paper said.

  It, however, says the numbers might be changed because the past data and numbers have been used.

  “Partial payment of DBT will also encourage states to make supplementary payments to farmers from their own funds since agriculture is state subject,” the paper said.

  It adds the biggest advantage of DBT is that it will cover farmers who don’t have any marketable surplus but a major disadvantage is that it might affect the supply of essential commodities as payments are not linked to production.

  A major disadvantage of DBT per farmer based on landholding is that it excludes tenant farmers, who comprise a significant section of growers.

  The paper concludes all the policy objectives of MSP — farmers’ income, etc — can be achieved by not adopting a “one-size fits all” approach.

  While for paddy and wheat, MSP plus procurement is an appropriate instrument, for commodities, for which farmers’ income is most important, direct income transfer may be the right way to go. Combining both for all crops might not be the right way to go.