Minimum Support Price: A question of how, not why

The demand for a legally guaranteed MSP has arrived on the centre stage of national politics. It’s time to devise the best mechanism for its delivery.

Published : Mar 07, 2024 11:00 IST - 20 MINS READ

A farmer in his wheat field on the outskirts of Amritsar, Punjab, on December 1, 2022. 

A farmer in his wheat field on the outskirts of Amritsar, Punjab, on December 1, 2022.  | Photo Credit: PTI

The farmers’ demand for a legal guarantee for a minimum support price (MSP) for agricultural produce needs to be welcomed. That this issue is being debated in the national media shows that a long-standing demand has moved beyond ignorance and casual dismissal.

LISTEN: The debate over MSP is often trapped in emotional outburst, political rhetoric, and bad faith. This has prevented a dispassionate discussion on the best possible mechanism to realise the demand.

The history of the debate shows a marked shift in positions, with many sceptics and critics now coming to support the farmers’ demand. Except for some diehard free market ideologues, critics have quietly shifted their critique from the why to the how. For the first time, a national party (the Congress) has openly supported the demand in no uncertain terms. We cannot be sure when the farmers will succeed in securing it, but we can be sure that MSP has arrived on the centre stage of national politics.

However, the debate suffers from serious ambiguities. Above all, despite a fair degree of consensus within the farmers’ movement, there are multiple readings and misreadings of what the MSP demand really stands for.

Prevalent confusion

One of the most widespread misreadings is conflating the demand for assured MSP with a demand for universal state procurement. This genuine or deliberate misunderstanding lends itself to scaremongering rather than a rational debate on the merits of the idea. The debate is often trapped in emotional outburst, political rhetoric, and bad faith. This has prevented a dispassionate discussion on the best possible mechanism to realise the demand when it is clear that meeting the demand will boost the purchasing power of rural India and lead to overall economic growth.

Also Read | Farmers’ protest 2.0: On the difficult road to MSP

That is what we attempt in this article. We begin by spelling out clearly what we mean by a legal guarantee of MSP. This is followed by why such a demand is justified on multiple grounds. And that takes us to an examination of how it can be realised and how much it will cost. Having made the case, we address some of the common criticisms.

What does it mean? Let us begin by noting that farmers are not demanding anything novel or radical. Contrary to media headlines, the farmers are not demanding MSP; the MSP already exists. The official promise and policy of MSP has existed for nearly six decades. The farmers are merely asking for a fair and assured realisation of this promissory note.

Basically, the farmers are demanding a guaranteed floor price for their produce. If the guarantee is enacted, the farmers will have a legal entitlement to receive—and the state will have a corresponding legal obligation to ensure—a remunerative MSP for all agricultural produce.

Note that the state’s obligation is to ensure that the farmers receive the statutory price for their produce, not necessarily to purchase the farmers’ produce. The farmers’ entitlement is to receive the statutory price, irrespective of who they receive it from. Also note that this is for a remunerative MSP and in principle for all agricultural produce.

Specifically, the farmers’ demand requires a threefold improvement in the existing MSP scheme: binding commitment, remunerative rates, and wider coverage. Thus, it has three important departures.

Contours of MSP

First, the MSP should be a legally binding commitment, not a mere announcement that the farmers cannot realise. The real-life experience of farmers shows that in both unregulated (farm gate) and regulated agricultural markets, more often than not, they get prices that are significantly lower than the MSP.

For most farmers, the MSP remains a maximum securable price, almost a dream price. This is regularly recorded in the official AgMarknet data on market prices and ritually recognised in every Commission for Agricultural Costs and Prices (CACP) report. The farmers want a way out of this farce. They want a legal backing.

Second, the farmers are demanding that the MSP be expanded to eventually cover all agricultural produce, not just the 23 crops for which the government currently announces MSPs.

It is true that the largest areas of cultivation are covered under these 23 crops, yet this selection works against marginal and women farmers, for whom livestock rearing, for instance, is a significant source of income. Remunerative prices for milk and similar products become critical for their livelihoods.

Similarly, horticultural produce has become the mainstay for many dryland farmers, and vegetable cultivation sustains many smallholders. Farmers want to end the exclusion of these produce from a fair price policy regime.

A farmer drying maize on the road, in Kannauj, Uttar Pradesh, on June 17, 2023. Maize is among the top cereal crops in the country, accounting for about 10 per cent of the total foodgrain production. 

A farmer drying maize on the road, in Kannauj, Uttar Pradesh, on June 17, 2023. Maize is among the top cereal crops in the country, accounting for about 10 per cent of the total foodgrain production.  | Photo Credit: SANDEEP SAXENA

Third, farmers want the MSP declaration to be made remunerative by basing it on an improved formula suggested by the Central government’s Farmers’ Commission, popularly known as the Swaminathan Commission. It suggested that the MSP be calculated at a minimum of 50 per cent margin over the comprehensive cost of production, which includes imputed cost on land rental and interest on capital costs.

In technical language, this is the “C2 cost concept” of the CACP. But that is not what the government follows today. The government’s MSP is currently based on cost that covers only out-of-pocket expenses (A2) added to valuation of family labour (FL).

MSS formula

The farmers’ demand for MSP to be at least C2+50 per cent assures farmers that, like any other business, they will get a reasonable margin over and above their cost of production. In fact, a responsive and responsible government should read this demand as “at least C2+50 per cent” and provide a greater margin on certain crops that it wants to incentivise for social equity or environmental sustainability.

The demand to improve the calculation of MSP also includes technical changes in the methodology for fixing MSP, as suggested by the Ramesh Chand Committee (2013) that included farmers’ representatives. This committee recommended the inclusion of several cost components now excluded or suppressed artificially when calculating the cost of production, such as the cost of maintaining a pair of bullocks, or the market lease rent for leased-in land, or the interest rates for agricultural credit from private moneylenders. The committee report never saw the light of day.

Why MSP? Ideally, there should be no need to make this argument, at least not to a government that declares MSP every year. The government of India does recognise that farmers need and deserve a minimum price for their produce. It has created a mechanism, however faulty and disputed, for computing and announcing this price.

And it acknowledges, though not in legal terms, its responsibility to “support” farmers with a floor price. Apparently, no one has an issue with MSP as long as it remains on paper, a promissory note that is never encashed. The trouble begins as soon as farmers actually start expecting—or worse, demanding—that the state fulfil its promise. This is when the very idea of MSP is called into question.

The idea of MSP is anchored in a moral contract between the farmers and the state. A poor postcolonial state that experienced population explosion was under a moral and political obligation to provide adequate and affordable food to its citizens. Food production and sale was no ordinary economic activity that could be left to market forces of demand and supply.

History of food security

In the 1960s, food security was a life-and-death question, critical for national security. It was the context of the various radical interventions such as the Green Revolution, state procurement, public distribution, and forced levies. Most of these policies involved huge costs for farmers, which were necessary for the survival of a young nation.

That is when MSP came into being, initially as an assurance to farmers that they would not suffer on account of the high yields of the new varieties of wheat and paddy, that the government would offer a decent price even if the market did not.

The fundamental and irreversible changes that the farmers made to their agricultural practices, which brought economic gains but ecological ruin, are rooted in this sacred contract. Can this contract be abrogated when the situation has changed?

“Limiting MSP to 23 crops works against marginal and women farmers, for whom livestock rearing, for instance, is a significant source of income.”

While the Indian state still fulfils its obligation to supply affordable food to poor consumers, can it renege upon its obligation to offer MSP to the impoverished producer, that too at a time when the Indian farmer suffers the impacts of climate change and is also expected to compete in global markets with heavily subsidised farmers from other countries?

This history explains the present situation of farmers. While the government routinely records their poverty, there is little official acknowledgement that the policies of the state are significantly responsible for their plight.

Indian agriculture has suffered from negative terms of trade. Far from offering support to farmers, the state policy of keeping food prices low continues to impose negative subsidies on them.

Basically, the state has transferred the burden of subsidising poor consumers to the shoulders of poor farmers. Therefore, it must take responsibility for the subsistence of farmers as well. If the state can intervene in the market to ensure minimum wages and fix an MRP (maximum retail price) on consumer products, it can do so for farmers as well. MSP is but a partial compensation for the state’s continuing extraction from farmers.

Also Read | Explained: Five unfounded objections against minimum support price

Economic angle

Even if we set the moral argument aside, there is an economic rationale. Farming is both essential and very risky. Moreover, Indian farmers are mostly small and marginal, and their holdings are mostly rainfed, with the accompanying disadvantages. Few other enterprises are as vulnerable to production and marketing risk as farming. No factor or variable is in the control of the farmer, starting from the inherited parcel of land to weather conditions to the vagaries of the domestic and international markets.

There is an understandably large variation on the supply side, given the many risks in farming, whereas the demand side is mostly stable at any point of time (low elasticity in demand), which causes volatility in prices. Further, there is low income elasticity when it comes to food, which means that demand for farm produce lags behind the general growth of the economy. For these reasons, an intervention to assure remunerative prices to producers is necessary.

Finally, there is an ecological rationale for MSP. Farmers in India are expected to be among the first victims of climate change, which could cause a drop of up to 25 per cent in their income. They need support to cope with this. Farmers need to diversify cropping patterns, which can happen only if they are assured of decent returns on the new crops.

The current procurement regime, which focusses only on wheat and paddy, encourages an unsustainable dependence on these two crops, and on sugarcane. A broad-based MSP will help farmers diversify and move the country towards sustainable agriculture.

How not to implement MSP

Much of the debate on MSP so far has been focussed on what and why. For the first time now, the crucial issue of policy design, on how to give effect to the legal guarantee of MSP, is getting some attention.

Let us begin by identifying how not to design it.

There are two popular misconceptions that need to be set aside. The first may be called a maximalist mechanism, which requires the government to procure the entire produce of all crops that sell below the official MSP. Unfortunately, this misconception is so widespread that the very idea of MSP is usually conflated with state procurement. This is neither necessary nor feasible.

The government does not have the physical infrastructure or capital for this, especially if the MSP is expanded to all agricultural produce. Even if it did, it would amount to state control of agricultural trade, which would be terribly inefficient and may well work against farmers.

The second misconception, often advocated by some well-meaning friends of the farmers’ movement, is a minimalist mechanism. Here, the claim is that farmers can be assured of MSP simply through a punitive provision. The government just needs to pass and enforce a law that would make any trading below MSP illegal and the farmers would automatically get remunerative prices.

But this suggestion flies in the face of economics and experience. States such as Madhya Pradesh and Maharashtra have had this provision in their Agricultural Produce Market Committee (APMC) laws, but it has not helped farmers. When the market price is substantially below the MSP, any punitive enforcement only drives trading underground, forcing farmers to sell in the black market for lower prices.

Far from helping the farmer, this idea helps governments to pretend that they can secure MSP without spending anything. Legal enforcement can be useful, but only when supplemented with well-funded economic intervention by the state. A good parallel is in the minimum wages statutory framework, which required enforcement but became meaningful for poor workers only when the MGNREGS was implemented on a large scale by the state. The statutory framework, along with government intervention, did the trick of increasing wages in the market.

How to fulfil MSP guarantee? We propose a bouquet of modalities to be pursued simultaneously to ensure realisation of MSP by farmers. It relies on three main mechanisms: expanded procurement, effective market intervention, and assured deficit payment. The basic idea is the government must actively intervene in the market to ensure that prices do not fall below the MSP and compensate farmers for any deficit if prices do fall below the declared MSP.

Expanding and fine-tuning the existing procurement operations is the first step. Although state procurement for affordable food schemes can only work for some commodities, it remains the first modality that directly assures MSP to farmers from whom the produce is purchased, and props up the price for many others.

In fact, the existing state procurement of foodgrains needs to be expanded a bit. If necessary, rice and wheat in public distribution system (PDS) shops can be reduced in favour of coarse grains. At the same time, edible oil and pulses can be included in PDS rations, along with milk and eggs in different schemes. This would lead to slightly expanded procurement.

A model Bill at hand
A Bill for MSP legal guarantee readily exists. In 2018, under the banner of the All India Kisan Sangharsh Coordination Committee, more than 30 farmers’ unions came together and created a draft Bill for MSP legal guarantee. And, interestingly, 21 political parties, almost all part of the INDIA bloc, were involved in the drafting of its statutory framework.
The final touches to this Bill were given by senior political leaders from these parties, sitting in the Parliament House Annexe. The draft version was widely discussed across the country in consultations organised by farmers’ groups, and many improvements were made before it was finalised. It was then introduced as Private Member’s Bills by Raju Shetti in the Lok Sabha in August 2018 and K.K. Ragesh in the Rajya Sabha.
This Bill can be the starting point for further consultations and improvements, if the government is truly committed to improving the condition of farmers and doubling their incomes.

Market interventions

The other mechanisms would work through multiple market interventions. The first can be smart market intervention by way of limited purchase whenever prices start dipping below MSP. Prices for produce often crash due to marginal oversupply. Therefore, the government has to purchase a small portion of the produce to shore up prices. This is not a novel idea: Cotton Corporation of India has done this quite successfully over the years. The government has a market intervention scheme for this purpose, but it is starved of funds and has been practically shut down by the current government.

The government can recover 75 to 80 per cent of the budget spent in initial procurement through storage and subsequent disposal of the produce in the open market, including export markets. Good financing of procurement agencies has also worked in the past, and the government must be prepared to allocate funds for any losses incurred in such trading by a procurement agency.

At the FCI’s food storage depot in Avadi near Chennai, on September 8, 2023. The depot, which is the second largest in the country, receives rice and wheat from Punjab, Haryana, Andhra Pradesh, Telangana, Chhattisgarh, and Odisha.

At the FCI’s food storage depot in Avadi near Chennai, on September 8, 2023. The depot, which is the second largest in the country, receives rice and wheat from Punjab, Haryana, Andhra Pradesh, Telangana, Chhattisgarh, and Odisha. | Photo Credit: M. SRINATH

The second modality for shoring up prices is to have farmer-friendly import-export policies. The government could ensure that the landing price of any produce from overseas is not less than the MSP. Here, the government need not pay anything while it can ensure that India’s farmers are not priced out through dumping of subsidised imports. The practice of imposing a minimum export price or export bans, or knee-jerk imports, should be discouraged except when dealing with a dire situation.

A third modality can be to modify the existing warehouse receipt scheme. Farmers should be encouraged to store their produce in the nearest warehouse, including in the panchayat. A certain percentage of the value of the produce estimated at MSP should be paid by banks as an advance loan against such stored produce. The government should bear the interest subvention cost for such bank loans. Daily market/price intelligence should be communicated to the farmer for a particular period depending on the commodity, but for a maximum of three months. If the prices in the regulated markets do not go higher than MSP within this time period, the farmer can leave the produce in the warehouse and become entitled to the value paid by the government directly into their account.

A fourth modality is that of incentivising farmer producer organisations (FPOs), which procure from member-farmers at MSP and show proof of the same. Since the main market risk is borne by the FPOs, the government can give them incentives such as tax holidays, infrastructure support, better working capital financing, and other interest subvention related incentives.

If these four methods do not succeed in keeping the market price at or above MSP level, the government must compensate the farmer by way of price deficiency payment (PDP). This may be the principal modality for perishable products but a fallback method for other crops.

The experience of Bhavantar Bhugtan Yojana in Madhya Pradesh contains useful lessons in designing a PDP. Instead of measuring the price deficit for each farmer, the scheme can be designed like crop insurance schemes, with panchayats being the geographical unit. Here the government only pays the difference between MSP and realised price if the latter is lower than the guaranteed MSP.

Implementation, cost, and guarantee

It is obvious that not all farmers and all commodities are going to realise prices lower than MSP and the additional budgetary outlays required for this modality would be fairly limited. Yet, this is the final backup which gives effect to the legal guarantee. If the state does not buy their produce and farmers are compelled to sell below MSP, they have a legal right to receive price deficiency payment.

This proposal does not claim to be perfect. There can be many other modalities. Even a legal mandate that ensures that no bidding in any agricultural market takes place below MSP can be useful, if combined with these modalities. It will involve trial and error, which is inevitable in any new policy.

The point of this proposal is to underline that a legal guarantee of MSP is not an impossible idea and that we do have modalities to turn it into a reality, provided there is a will to do so.

“While the Indian state still fulfils its obligation to supply affordable food to poor consumers, can it renege upon its obligation to offer MSP to the impoverished producer?”

How much will it cost? Arguing against the farmers’ demands, the government’s spokespersons have put forward sky-high figures such as Rs.14 lakh crore as the cost of implementation. The government is using a deliberately misleading calculation to paint the MSP demand as unrealistic.

There are two wrong assumptions. First, it assumes that the government needs to purchase every single quintal of every crop, whereas that is not what the farmers are demanding.

Second, common sense dictates that the total purchase cost is not actually an expenditure for the government because the government will thereafter sell the crop and retrieve most of the funds spent. In principle, it may even make a profit on the sale.

In reality, the actual expenditure incurred by the government is the difference between the price at which the government buys and the price at which it sells the crop. Moreover, not all commodities require an intervention; government intervention is required only when the market price is below the MSP. To estimate the actual cost of implementation, we first estimate the “deficit below MSP”, that is, the total shortfall resulting from the market price being below MSP. To arrive at this, we analyse the market price data from mandis across the country and estimate the quantities sold below MSP.

But the actual cost to the government will be significantly lower than this. The deficit below MSP provides the ceiling for cost, assuming that the entire difference between market price and MSP is shouldered by the government. That will be true only if the PDP system is invoked for the entire crop produced, or if the government makes an MSP purchase of every single quintal of crop when the market price is below MSP and then sells the crop at market price.

In reality, when the government makes a market intervention, market price would rise from the existing level even if the government purchases only 10 per cent of the crop. Once market price rises, government expenditure decreases significantly or disappears if the new price stabilises above MSP.

Market price and announced MSP

Here, we have estimated the deficit below MSP on the basis of the most recent agricultural market data of 2022-23. We examined 15 major crops, which together occupy more than 90 per cent of the cropped area. In four crops, namely, wheat, maize, soya bean, and cotton, the average market price in all States was above the announced MSP, whereas for the rest, there was a significant deficit between market price and announced MSP.

Also Read | Editor’s Note: India’s war against its own farmers

Since there is a big price variation between States, the calculations are performed for each cultivating State and a weighted average is taken. We take average market prices and total marketed surplus of the crop for each State and calculate the deficit arising out of the gap between market price and MSP within that State.

The deficit below announced MSP for each crop is first calculated for each State, and then the weighted average is taken to get the national figure (provided in table on page 30). For instance, the total deficit below MSP for paddy is Rs.5,439.8 crore. The total deficit below announced MSP for all below-MSP crops for the 2022-23 marketing year adds up to Rs.26,469 crore. We performed the same calculations with the “demanded MSP” (or Swaminathan MSP), which is comprehensive cost (C2)+50 per cent. The total deficit below demanded MSP for the 15 crops is Rs.2,00,710 crore (see table on page 30).

Clearly, the maximum cost of MSP guarantee at the present level of MSP is quite affordable at Rs.26,469 crore, based on 2022-23 data. The cost during any particular year will depend on the gap between market price and MSP. Considering the tremendous boost in farmer incomes an MSP hike can provide, and the resulting boom in the economy with higher purchasing power in rural India, we believe the expenditure is worthwhile.

The present moment offers a historic opportunity. All farmers’ movements have reached a point of convergence, even if action plans are different, agreeing on the Swaminathan formula. Now it is a matter of political will. While the Narendra Modi government has dug its heels in, farmer organisations are determined to push forward. The MSP could become a major issue in the upcoming Lok Sabha election.

Kavitha Kuruganti is a farmers’ rights activist who was part of the historic Kisan Andolan of 2020-21 and a member of the Ramesh Chand Committee.

Kirankumar Vissa is co-founder of Rythu Swarajya Vedika, a farmers’ rights organisation in Telangana and Andhra Pradesh, and part of the Samyukta Kisan Morcha.

Yogendra Yadav, the national convenor of Bharat Jodo Abhiyan, is the founder of Jai Kisan Andolan, a constituent of the SKM, and an academic at CSDS.

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