Every year we see news of increase in government announced Minimum Support Prices (MSP) and how the MSP benefits farmers get a reasonable income from their production. We also hear about complains by farmers about how low the MPS is. This year was no exception.
What is MSP?
The MSP and the government system of foodgrain procurement are all part of the 1960s green revolution policies aimed at achieving food security for the country.
As part of these policies, the government created a system of food grain procurement for multiples reasons:
- Maintaining reserve stocks of food (national food security)
- Providing price support to farmers by declaring, and procuring at, ‘minimum support price’ for various commodities
- Selling the grain at subsidized rates for those who cannot afford it
The MSP is calculated by the CACP (Commission for Agricultural Costs and Prices), based on estimate of the average costs of production of each commodity and a desired farmer profit. The MSP is declared for 24 commodities, for Kharif and Rabi seasons.
The MSP is simply the recommended price for the government to buy produce at. Over the years, the nominal MSP has increased for all produce, but real MSP (inflation adjusted) have varied quite a bit.
How much does the govt. procure?
If the MSP is intended to provide reasonable income to farmers, such a system would work only if the govt. directly procures the majority of the produce. Of all the 24 commodities, government procurement is greatest for wheat and rice. GOI currently procures about 30% of all wheat and rice produced in the country (for market and subsistence) and about 6-7% of other commodities.
Who benefits from MSP?
The government’s procurement operations concentrate on a few crops and a few states. For paddy, about 50% of the total paddy procured for the central pool came from three states: Punjab, Andhra Pradesh and Telangana. For wheat, about 60-65% is procured just form Punjab and Haryana. Even within these states, procurement takes place only in a small number of districts. Strong lobbies (e.g. wheat and rice in Punjab and sugarcane farmers in Maharashtra) also influence where and how much procurement takes place. (For more details on procurement, see Pocketbook of Agricultural Statistics 2016).
In the case of oilseeds and pulses, in principle the government is supposed to procure these commodities when market prices crash. However, the quantity procured as a percentage of the marketed surplus is usually negligible.
As the govt. procurement is concentrated at a few centres, it requires farmers to have transport facilities to reach the procurement centres. There are sometimes delays in govt. procurement which makes it difficult for small and marginal farmers to wait for sale of their crops. In districts where a large proportion of production is procured by the government, the MSP can also affect the overall market prices at which the traders buy produce, due to competition from govt. agencies.
So direct procurement benefits only a small percentage of farmers because
- procurement is concentrated in some states and districts, e.g. Punjab, Haryana, AP,
- while MSP is set for 24 commodities, the government procures mostly wheat and rice
- most of the MSP procurement by the govt. happens from medium to large farmers
In fact, in 2015, a High Level Committee on Reorienting the Role and Restructuring of Food Corporation of India estimated that only about 6% of farmers benefit from the MSP. This is also evident from various data from the NSSO, as below.
So the next time we see a lot of debate over MSPs, it would be useful to remember that currently it benefits only 6% of farmers. But if the region, crop, and land holding bias of MSP could be fixed, MSP could provide much needed income assurance and risk reduction for the most vulnerable farmers .
- Kannan 2015. Trends in Agricultural Incomes: An Analysis at the Select Crop and State Levels in India. Journal of Agrarian Change. 15(2)
- NSS Report 473 Statement 3.12b
- Pocketbook of Agricultural Statistics 2016, Table 9.2
- Report of the High Level Committee on Reorienting the Role and Restructuring of Food Corporation of India (“Shanta Kumar Committee Report”). January 2015. pp 12-13