Economics of an MSP guarantee: Experts say may be difficult given financial implications

Amidst the ongoing farmers’ protest, experts and analysts believe that a legal guarantee for minimum support price (MSP) may be difficult to implement given its financial implications and the caution that a one-size-fits-all approach may not be appropriate.

While the government has already indicated that a guaranteed MSP, which is the main demand of the agitating farmers, is not possible, official sources have indicated that if an MSP guarantee law were to be introduced, the government would be looking at an additional expenditure of at least Rs 10 lakh crore annually.

Also read: Sensex rebounds 1,000 pts from day's low, Nifty ends above 21,800; oil & gas, banking, metal shares top gainers

Pushan Sharma, Director-Research, CRISIL Market Intelligence & Analytics, said that if the government procures the entire production of 23 crops for which MSP has been announced, the impact will be multi-pronged. “For the exchequer, this will mean materially higher expenditure,” he said.

“Considering the government will procure only crops trading in mandis below the MSP, our calculations show it will need a working capital of about Rs 6 lakh crore in Marketing Year (MY) 2023,” he said. The agency considered 16 of 23 crops, which account for over 90% production of the field crops, for the analysis. The real cost to the government, though, will be the difference between MSP and mandi prices, which works out to around Rs 21,000 crore for MY2023, the agency said.

Also read: Will Nifty's smart recovery sustain? What a Bullish Engulfing pattern suggesting

For farmers, it would mean cash support during times when prices plummet below MSP and freedom to sow crops of their choice.

Experts also note that though a legal guarantee on MSP may not be possible, it is unlikely that MSP will ever be withdrawn by any government, given the huge political support base of farmers. In response to the farmers’ protest, the Congress has already announced that it would provide a legal guarantee for MSP to every farmer, based on the recommendations of the M.S. Swaminathan Committee, if it is voted to power.

“This is a very complex issue and requires much more dialogue and cannot be given in one go. Further, given the diversity across states, one policy fits all approach may not work,” noted a policy observer, adding that there are several experiments that are being carried out by states, such as price deficiency payments, while there is also a debate over income versus price support.

Madan Sabnavis, Chief Economist, Bank of Baroda, notes that a legal guarantee for procurement and an annual increase in MSP by the government every year may not be feasible. “MSP is ideally a support price and is not supposed to the first choice but has to be the last resort. However, over time, it has become the first choice as MSP increases every year,” he notes.

Further, while procurement of rice and wheat is done annually by the government, it cannot be done for all crops every year.

Sunil Sinha, Senior Director and Principal Economist, India Ratings and Research said that a law guaranteeing MSP is doable but it will have severe financial implications for the government. “Once it is made into a law and is formula driven, the government will have to shell out a specified amount every year irrespective of its financial situation and without the leeway to tweak the MSP,” he said, adding that it will become a fixed expenditure like salaries and pensions.

However, given that farming is not remunerative enough, the fixing of MSP can be more of a consultative process, he said.

At present, the government fixes MSP for 22 mandated crops, on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP) as well as taking into consideration the views of the Centre, states, and other stakeholders. Following an announcement in the Union Budget 2018-19, MSP is fixed at a level of one and a half times of the cost of production as a pre-determined principle.

 “Accordingly, MSPs for all mandated Kharif, Rabi, and other commercial crops have been fixed with a return of at least 50 per cent overall India weighted average cost of production, each year, since 2018-19,” Arjun Munda, minister of agriculture and farmers welfare had informed the Lok Sabha recently in response to a question.

The procurement of foodgrain has increased from 761.40 lakh metric tonnes in 2014-15 to 1,062.69 lakh metric tonnes in 2022-23 benefitting more than 16 million farmers, he had further said, adding that the expenditure incurred (at MSP values) on procurement of foodgrains increased from Rs 1.06 lakh crore to Rs 2.28 lakh crore, during the same period.