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| India’s Minimum Support Price (MSP) Mechanism: Balancing Farmer Welfare, Market Dynamics, and Sustainable Agriculture | | | Dr. Yudhishther Singh Bagal and Dr. Shivalika Sood
Developing countries are mostly agrarian economies and the main occupation in these countries is agriculture along with manufacturing and service sector. However, empirical evidences suggests that farmers in developing countries such as India are of low- and marginal-income category. Governments have used a number of mechanisms to protect farmers against fluctuations in prices and hold fair prices. The biggest of these in India is the Minimum Support Price (MSP) system- a government-guaranteed price at which some crops are purchased by farmers.
The agricultural sector in India had some daunting challenges before the independence. Chronic food crises and frequent famines caused hunger and malnutrition. The nation depended heavily on import of food products particularly when there was a drought or crop failures. Traditional farming practices and lack of access to modern farming inputs crippled agricultural productivity putting farmers at the mercy of exploitation by middlemen and traders who suppressed prices.
The period of post-independence changed the paradigm. High-yielding varieties (HYVs) of seeds were introduced, as well as increased irrigation and fertilizer application, during the Green Revolution of the 1960s. This revolution greatly increased agricultural production but also made people more dependent on expensive inputs, making farmers more vulnerable to changes in the market and volatile inputs prices.
In a bid to stabilize markets and secure farmers, the government established the MSP system in 1966-67, and the first crops to be covered were the staple foods, wheat and rice. In 1965, the Agricultural Prices Commission (APC) (since 1986, the Commission for Agricultural Costs and Prices (CACP)) was established to recommend MSPs on the basis of crop costs, input prices, and market conditions.
The main objectives of MSP are to:
• Protect farmers from distress sales triggered by volatile market prices.
• Incentivize the production of essential food grains and crops.
• Ensure food security for a rapidly growing population.
• Promote agricultural development and modernization.
MSP is determined prior to every sowing season of Kharif (summer) and Rabi (winter) crops, covering 24 major commodities (wheat, rice, pulses, oilseeds and sugarcane). The prices will be determined based on the cost of production-labor, land and inputs-demand and supply forces and a minimum of 50 percent profit over the cost of production to give the farmers the fair deal.
The Food Corporation of India (FCI) procurement agencies buy produce at MSP, only when the market price is lower than the support price. This will ensure that the price does not drop significantly and farmers have a cushion particularly during periods when production is too high or when the market slows down.
MSP has been significant in raising the income of farmers, especially of staple food crops like wheat and paddy. It has contributed to stabilizing prices and a certain degree of predictability in incomes, which guards farmers against exploitation by middlemen. The effect is, however, subtle and unbalanced.
The fact that procurement systems have poor reach is one of the critical limitations. Procurement centers are not available to all farmers because of infrastructural deficiencies, bureaucracies, and geographical differences. Therefore, many small and marginal farmers, who happen to be the majority, are often unable to directly access MSP. In addition, in most instances market prices are set higher than MSP and farmers sell in the open market instead of through the government reducing the effectiveness of the system as an income guarantee.
The issue of regional disparity complicates further the effect of MSP. States that have a higher procurement infrastructure, like Punjab and Haryana, have a higher MSP realization, whereas farmers in eastern and central India tend to get lower effective prices. There are also crop-specific differences: cash crops such as sugarcane often sell above MSP, whereas pulses and oilseeds are characterized by low buyability, so the safety net does not pay off with these farmers.
Notwithstanding these constraints, MSP-linked crops pay about 20-30 percent on average to farmers, and the average agricultural household earns about Rs. 10,282 per month (2022-23 NSSO report). The fact that government agencies, including FCI, which are buying a portion of the total production of paddy, have very limited procurement capacity also highlights the loopholes in the system.
MSP not only affects farmer income but also plays a significant role in shaping market dynamics and consumer prices. By acting as a price floor, MSP influences market prices in multiple ways:
• When market price falls below MSP, government procurement increases, stabilizing prices but sometimes creating upward price pressure by restricting supply in the open market.
• When market price exceeds MSP, farmers sell their produce elsewhere, potentially lowering supply to government channels but possibly pushing market prices higher.
• MSP hikes can lead to increased input costs such as seeds and fertilizers, which in turn raise production costs and consumer prices.
Since MSP deals with staple commodities such as rice, wheat, and pulses, the impact of this is transferred to the food supply chain, which affects consumer inflation. Inflation increases the price of commodities, which impact low-income households the most since they use much of their income to buy food. The resulting inflation pressure presents policy makers with a fine balancing act to ensure that the farmers incomes are maintained and consumer affordability is not jeopardized.
To moderate food price inflation and ensure availability, the government undertakes various measures such as:
• Releasing buffer stocks into the market to increase supply.
• Imposing or adjusting Minimum Export Prices (MEPs) to restrict exports and maintain domestic availability.
• Modifying import duties to increase supply and lower prices.
• Targeted subsidy schemes and distribution of essential commodities to vulnerable sections.
While effective to an extent, these interventions often lag behind real-time price fluctuations and impose fiscal burdens. They may also distort market signals, discouraging private sector investments in supply chains and infrastructure.
In 2004, the National Commission on Farmers, led by M.S. Swaminathan, submitted critical recommendations regarding MSP:
• MSP should be at least 50% more than the comprehensive cost of production (C2), covering all paid and imputed costs plus a fair profit margin.
• MSP coverage should expand to all major crops, not just select staples.
• Strengthen procurement infrastructure and ensure timely payments.
• Improve market access and promote direct marketing to bypass intermediaries.
• Support climate-resilient farming methods to protect farmer livelihoods.
• Increase public investment in agricultural research and extension services.
The following recommendations were intended to make MSP remunerative and inclusive of sustainable agriculture. Fiscal and inflation concerns have however prevented complete implementation and the government is exploring other methods.
The continual straining of farmer welfare, financial viability and market laws can be seen through the protests of farmers who seek MSP as a legal entitlement.
Although MSP benefits farmers by providing income, it also influences the pattern of cropping and the use of resources which have a substantial environmental impact:
• The steep MSPs of water-consuming crops such as rice and sugarcane promote excessive irrigation, which reduces the ground water and contributes to ground soil erosion.
• The excessive application of chemical fertilizers associated with crops that have greater MSPs, leads to a reduction in soil health, water contamination and green house gases.
• It leads to a monoculture farming system that diminishes soil biodiversity and resilience, as they are mainly supporting a small range of staple crops.
• High yielding varieties emphasized in MSP procurement can tend to undermine production of a wide range of traditional crops that could be more reliable under local climatic and environmental conditions.
These issues demonstrate that the existing MSP system does not explicitly promote the sustainability of agriculture such as organic farming, water conservation, or crop diversification.
To transform MSP into an instrument that can balance the income of farmers with the sustainability of the environment, various reforms are needed, among them are:
• Incorporate sustainability criteria into MSP calculations in order to incentivize responsible use of resources and conservation.
• Extend MSP to more crops, and enhance crop diversification and well-balanced agro-ecosystems.
• Implement direct payments or incentives on ecosystem services such as soil regeneration, biodiversity conservation and carbon sequestration.
• Increase funding to agricultural research and extension in order to create and spread sustainable agricultural technologies and climate-adaptive practices.
• Learn about market-based solutions including carbon credits or green bonds to generate new revenue streams associated with sustainability.
These reforms would contribute to developing a fairer and greener agricultural sector that would guarantee the prosperity of farmers and protect natural resources and food chains in the future.
The MSP system in India represents a multidimensional interaction between farmer welfare, market forces, consumer interests and environmental sustainability. It has helped stabilize farm income and national food security but also has severe problems:
• Lapses in the procurement infrastructure and access prevent fair benefits to farmers.
• There are concerns of pricing of food as a result of MSP and how consumers can afford them.
• MSP-driven cropping patterns need to be addressed urgently in terms of their environmental sustainability.
• There are fiscal and political constrictions that make reforms difficult.
The MSP system must adapt to ensure a balance between farmer income and environmental sustainability. It’s vital to incorporate sustainability criteria, encourage crop diversification, and investigate alternative incentives for the long-term advancement of agriculture and the preservation of the environment. Ongoing discussion and research are necessary to formulate effective strategies that protect farmers’ livelihoods while also conserving the environment for future generations.
(The authors are Assistant Professor, School of Agriculture, Lovely Professional University, Punjab) |
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