Minimum Support Price (MSP) is the assured price at which foodgrains are procured from farmers by the central and state governments and their agencies, for central pool of foodgrains. The central pool is used for providing foodgrains under the Public Distribution System (PDS) and other welfare schemes, and also kept as reserve in the form of buffer stock.  However, in the past few months, there have been demands to extend MSP to private trade as well and guarantee MSP to farmers on all kinds of trade.

Is MSP applicable for all crops?

The central government notifies MSP for 23 crops every year before the Kharif and Rabi seasons based on the recommendations of the Commission for Agricultural Costs and Prices, an attached office of the Ministry of Agriculture and Farmers’ Welfare. These crops include foodgrains such as cereals, coarse grains, and pulses.  However, public procurement is largely limited to a few foodgrains such as paddy (rice), wheat, and, to a limited extent, pulses.

Since rice and wheat are the primary foodgrains distributed under PDS and stored for food security, their procurement level is considerably high. 

How does procurement vary across states?

The procurement of foodgrains is largely concentrated in a few states.  Three states (Madhya Pradesh, Punjab, and Haryana) producing 46% of the wheat in the country account for 85% of its procurement.   For rice, six states (Punjab, Telangana, Andhra Pradesh, Chhattisgarh, Odisha, and Haryana) with 40% of the production have 74% share in procurement. 

The rice and wheat focus

• Procurement of marketed surplus of paddy (rice) and wheat at Minimum Support Price (MSP) completely insulated farmers against any price or market risks. It also ensured a reasonably stable flow of income from these two crops.
• Over time, the technological advantage of rice and wheat over other competing crops further increased as public sector agriculture research and development allocated their best resources and scientific manpower to these two crops.
• Other public and private investments in water and land and input subsidies were the other favourable factors.
• Thus, wheat in rabi and paddy in Kharif turned out to be the best in terms of productivity, income, price and yield risk and ease of cultivation among all the field crops (cereals, pulses, oilseeds).

85% wheat procurement is from three states (2019-20)

76% of the rice procured comes from six states (2019-20)

Punjab, Haryana vs. States

The region comprising Punjab, Haryana and western Uttar Pradesh, was an early adopter of Green Revolution technology. It was also a major beneficiary of various policies adopted to spread modern agriculture technology in the country.

• High productivity, assured MSP which is often above open market price, free power, and fertilizer subsidy underlie the higher income per unit area from wheat and paddy cultivation.
• Land-labour ratio is also very favourable in Punjab when compared to other States; on an average, a farmer owns and cultivates 2.14 hectares net sown area as against 1.42 hectares in Haryana and 1.17 hectares at the national level.
• An estimate of income (derived from National Accounts Statistics) shows that all agriculture activities taken together to generate an annual net income of ₹5.31 lakh per cultivator in Punjab; it is ₹3.44 lakh in Haryana while the all-India average is ₹1.7 lakh (reference year, 2017-18).

How has MSP affected the cropping pattern?

According to the central government’s procurement policy, the objective of public procurement is to ensure that farmers get remunerative prices for their produce and do not have to resort to distress sale.  If farmers get a better price in comparison to MSP, they are free to sell their produce in the open market.  The Economic Survey 2019-20 observed that the regular increase in MSP is seen by farmers as a signal to opt for crops which have an assured procurement system (for example, rice and wheat).  

Declining Incomes

• Loss of growth momentum in the income from the agriculture sector, which has fallen to 1% in Haryana and 0.6% in Punjab after 2011-12.
• With the productivity of rice and wheat reaching a plateau, there is pressure to seek an increase in MSP to increase income. However, demand and supply do not favour an increase in MSP in real terms.
• In India, the per capita intake of rice and wheat is declining and consumers’ preference is shifting towards other foods.
• The average spending by urban consumers is more on beverage and spices than on all cereals. On the supply side, rice production is rising at the rate of 14% per year in Madhya Pradesh, 10% in Jharkhand and 7% in Bihar.

Issues related to procurement

• Limited procurement in different regions.
• MSP leading to farmer preference for the production of few crops like wheat and rice.
• The growing rice production will further increase pressure on the procurement and buffer stock of rice. Rice and wheat procurement in the country has more than doubled after 2006-07 and buffer stocks have swelled to an all-time high.
• The country does not find an easy way to dispose of such large stocks and they are creating stress on the fiscal resources of the government.
• Procurement of almost the entire market arrivals of rice and wheat at MSP for more than 50 years has affected the entrepreneurial skills of farmers to sell their produce in a competitive market where prices are determined by demand and supply and competition.

Environmental issues, unemployment

• The biggest casualty of paddy cultivation and the policy of free power for pumping out groundwater for irrigation is the depletion of groundwater resources.
• In the last decade, the water table has shown a decline in 84% observation wells in Punjab and 75% in Haryana.
• In the last couple of years, the burning of paddy stubble and straw has become another serious environmental and health hazard in the whole region.
• Another rather more serious challenge for the two States is to provide attractive employment to rural youths. Most of the farm work in these two States is undertaken by migrant labour.

Is MSP mandatory for private trade as well in some states?

MSP is not mandatory for purchase of foodgrains by private traders or companies.  It acts as a reference price at which the government and its agencies procure certain foodgrains from farmers.

In September 2020, the central government enacted a new farm law which allows anyone with a PAN card to buy farmers’ produce in the ‘trade area’ outside the markets notified or run by the state Agricultural Produce Marketing Committees (APMCs).  Buyers do not need to get a license from the state government or APMC, or pay any tax to them for such purchase in the ‘trade area’.  These changes in regulations raised concerns regarding the kind of protections available to farmers in the ‘trade area’ outside APMC markets, particularly in terms of the price discovery and payment.  

In October 2020, Punjab passed a Bill in response to the central farm law to prohibit purchase of paddy and wheat below MSP. Any person or company compelling or pressurising farmers to sell below MSP will be punished with a minimum of three-year imprisonment and a fine. 

Similarly, in November 2020, Rajasthan passed a Bill to declare those contract farming agreements as invalid where the purchase is done below MSP.   Any person or company compelling or pressurising farmers to enter into such an invalid contract will be punished with 3 to 7 years of imprisonment, or a fine of minimum five lakh rupees, or both.   Both these Bills have not been enacted yet as they are awaiting the Governors’ assent.

Way forward

• The solution to the ecological, environmental and economic challenges facing agriculture in the traditional Green Revolution States is not in legalizing MSP but to shift from MSP crops to high-value crops and in the promotion of non-farm activities.
• Rather than focusing on a few enterprises, Punjab and Haryana should look at a large number of area-specific enterprises to avoid gluts.
• This will require a mechanism to cover price and market risks. Farmers’ groups and farmer producer organizations can play a significant role in the direct marketing of their produce.

To encourage crop diversification and thereby reduce the consumption of water, some state governments are taking measures to incentivise farmers to shift away from paddy and wheat.  For example, Haryana has launched a scheme in 2020 to provide Rs 7,000 per acre to those farmers who will use more than 50% of their paddy area (as per the area sown in 2019-20) for other crops.  The farmers can grow maize, bajra, pulses, or cotton in such diversified area.  Further, the crop produce grown in such diversified area under the scheme will be procured by the state government at MSP.

• Both Punjab and Haryana need to promote economic activities with strong links with agriculture tailored to State specificities.
• Some options for this are: promotion of food processing in formal and informal sectors; a big push to post-harvest value addition and modern value chains; a network of agro- and agri-input industries; high-tech agriculture; and a direct link of production and producers to consumers and consumers without involving intermediaries.
• The traditional Green Revolution States of Punjab and Haryana would need to shed “business as usual” approach and embrace an innovative development strategy in agriculture and non-agriculture to secure and improve the future of farming and rural youth.

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