Improving competitiveness: MSP benefits continue to remain concentrated

Minimum support price (MSP) has been an integral part of India’s agricultural policy. While it is driven by a well-intentioned effort to ensure food security and safeguard farmers from price risks, it has also had unintended consequences such as less than desired crop diversification and environmental degradation in some parts of the country. While there is a need to boost farm income, a legally enforced MSP, which some farm groups are demanding, may not be the best solution. This may disrupt price discovery and skew production further, among other consequences. Besides, it is not an effective measure to protect farm income. A recent study by the ICAR-National Institute of Agricultural Economics and Policy Research concludes that the outreach of MSP remains limited.  The findings indicate that only 15 per cent of paddy and 9.6 per cent of wheat farmers engage with the procurement system. Moreover, it remains confined to mostly large farmers. Small and marginal farmers, despite producing 53.6 per cent of paddy and 45 per cent of wheat, have low participation in public procurement. The direct relationship between participation in the MSP-backed procurement system and farm size arises because small and marginal farmers are likely to have low awareness about the procurement system, and are often constrained by their limited scale of production. 

Other complexities associated with MSP include a large fiscal outgo, over-production of water-intensive crops, and inadequate storage infrastructure. For improving farm income, it is important to make sure that markets work well. This involves investing in physical infrastructure and facilitating the building of efficient value chains, which minimise the price gap between farm and fork. To protect farmers from price fluctuation, which is always a risk, the above-mentioned study calls for upscaling the price-deficiency payments, whereby farmers are compensated for the difference between MSP and lower market prices. While this aims to reorient the MSP policy away from procurement towards acting as more of an income instrument, its implementation is also fraught with problems. In the past, Madhya Pradesh experimented with the policy, called Bhavantar Bhugtan Yojana, but had to give up after just one season. As agricultural economist Ashok Gulati has pointed out, the policy can push market prices even lower, with farmers and traders colluding to show market prices much lower than the MSP. This can increase pressure on the exchequer.

  Clearly, there are no easy answers. Nonetheless, what India needs is to incentivise private procurement, promote crop diversification, and focus on agricultural research. Derivatives markets in agri-commodities may also help stakeholders hedge against market uncertainties and price risks. India needs free markets and strong agri-value chains where farmers get a large share of what consumers pay. As has been argued by experts, growth in the sector is mainly driven by non-MSP products. There is a need to build on these successes and shift production with the changing demand patterns. Government intervention in terms of price support and deficiency payments, which have limitations in terms of reach and effectiveness, will not be able to support the sector permanently. Given the increasing pressure to open up the agri market to trade, all stakeholders, including the government, need to look for ways to improve competitiveness.