Farmers’ protest: The financial cost of legalising MSP

Farmers’ protest: The minimum support price (MSP) was introduced in the mid-1960s to encourage the cultivation of labour-intensive staples such as wheat and paddy as India wasn’t self-sufficient in these commodities back then.

Today, India is the world's largest rice exporter and amongst the largest exporter of wheat and onion.

Despite this, farmers remain economically vulnerable. And the drone around MSP refuses to subside.

The MSP serves as a base price, ensuring farmers don't sell their produce below that level. It is computed by the government based on the cost of cultivation, which includes agriculture inputs, family labour, fixed assets such as machinery and the rent for the owned land.

In addition, the Commission for Agricultural Costs and Prices also considers demand, stock position, and macroeconomic factors such as consumer price indices and global dynamics to determine MSP for 23 crops.

CRISIL MI&A Research estimates ~Rs 13 lakh crore expenditure for the government if the entire production of 16 of the 23 crops (these 16 crops tracked by CRISIL account for ~90 per cent of field crop production) is procured at the announced MSP for marketing year 2022-23.

Eight of these 16 commodities — wheat, maize, jowar, tur, gram, soybean, cotton, and jute — are traded at mandi prices higher than the MSP, implying farmers would prefer to sell in the open market and not at the MSP.

For the other eight — paddy, bajra, ragi, urad, moong, groundnut, mustard, and sunflower — where market prices are lower than MSP, legalisation would lead to procurement of all these crops by government, leading to a financial cost of Rs 6 lakh crore to the exchequer.

In addition, there would be costs on several related infrastructure, to store, transport and market these procured produce.

However, the real cost borne by the government will be a factor of the difference between MSP and the prevailing market price. For instance, in the case of paddy, the MSP announced for MY23 is Rs 20,400/tonne, while the average mandi price during the year was Rs 20,170/tonne. The cost of procurement at MSP for paddy would therefore be ~Rs 3.76 lakh crore, considering a production of ~185 million tonne for the crop during MY23, including kharif and rabi. The value of the same crop in the open market was lower at ~Rs 3.72 lakh crore. Hence, the real cost to the government would be the difference between these two figures, which is ~Rs 4,000 crore.

A similar analysis for the 8 crops having mandi price lower than MSP shows the price difference between the crop value at MSP and that of mandi prices is ~Rs 21,000 crore for MY23. However, offloading of stocks in the open market tends to pull down the mandi prices further, which may result in a still higher differential for the exchequer.

Another important aspect to look at is how broad-based MSP procurement across regions is. According to NSSO’s report, as of 2018-19, only ~10 per cent of the farmers in India have sold their produce at MSP, which shifts focus to the crop mix being procured.

India being a largely paddy-wheat-based agriculture ecosystem, meaningful procurement is done only for these crops. As of MY23, ~46 per cent and ~24 per cent of paddy and wheat produced during the year, respectively, was procured at MSP, followed by gram and mustard at 19 per cent and 9 per cent, respectively.

Though other pulses and oilseeds — tur, urad, moong, sunflower and groundnut — are procured by agencies like NAFED, the share of procurement in total production is not more than 3 per cent. Even at the state level, the procurement of crops such as jowar, bajra, and maize by MARKFED of the respective states remains minuscule, which is holding back farmers from crop diversification.

Also, concentration of procurement is confined to specific states such as Punjab, Haryana, Uttar Pradesh, Madhya Pradesh, Chhattisgarh and Telangana in the case of cereals. Hence, it can be said that encouraging geographic diversification of the procurement operations will cater to the larger farming population and increase income for farmers, which may, in turn, push rural consumption demand.

Procurement of crops at MSP would be beneficial also because farmers will receive guaranteed income support, especially during market price fluctuations. The price guarantee will encourage farmers to take up geographically suitable crops for their agroclimatic zones.

That said, there are differing opinions on the use of MSP in determining crop prices for farmers. While some believe in leaving prices to market forces, another school of thought is that farmers who make up half of the country’s population are still economically vulnerable and have a low risk appetite. If MSPs are withdrawn and prices plummet for the crops, it may adversely impact the livelihoods of these farmers.

Currently, MSP meaningfully applies to only certain crops, causing farmers to rely heavily on paddy and wheat production. By broadening this to include all 23 crops to be procured at MSP, farmers may diversify to other crops and reduce their risk.

Additionally, the government can use MSP as a tool to encourage the cultivation of certain crops by offering larger MSP increases for those crops. For example, maize can be encouraged due to its use as a source of ethanol to reduce crude oil imports. More incentive for this crop

can lead farmers to choose this over other crops. Over a period of time, a market-oriented price determination mechanism can be thought of as a final solution.

Note:

1. Marketing year 2023 includes kharif sown in Jun-Aug 2022 and harvested in Sep-Nov 2022 and rabi sown in Oct-Dec 2022 and harvested in Feb-Apr 2023.

2.These calculations have been based on the central government’s final production estimates for MY23 for the eight field crops as mentioned above, whose mandi prices were lower than MSP in MY23; MSP figures are as announced by the government, and the weighted average mandi prices are tracked by CRISIL from more than 2,000 mandis across the country.

(The author is Director of Research at CRISIL Market Intelligence and Analytics. The views expressed by the author are personal)