India’s agricultural price support policy has once again become the centre of debate with the demand for legal guarantee to minimum support price (MSP) raised by the agitating farmers in Punjab.
Indian agriculture, similar to that in other economies, is incentivised to protect the incomes and livelihoods of farmers, especially the smallholders, against various risks involved during crop production, post-harvest management and marketing. Agricultural price support policy with MSP accompanied by procurement is one of such major support initiatives to ensure remunerative prices for farmers.
Although operational for nearly six decades, the price support policy in the existing form is effective only with procurement by the government agencies when open markets prices move below MSP.
Out of 23 field crops, however, procurement operations by government agencies have been largely confined to rice, wheat, and to some extent, cotton. Meanwhile, sugarcane is entirely procured by processors (mills) at MSP.
Also read: Parliamentary Standing Committee Recommends Implementation of Legally Binding MSP, Farm Loan Waiver
As a result, farmers producing other crops like pulses, oilseeds, nutri-cereals etc have been shifting to cultivation of crops that allow procurement, like rice and cotton. This has led to two serious consequences: first, the exhaustion and pollution of natural resources; second, a shortage of pulses and oilseeds essential for nutritional security.
Under such a scenario, there is an urgent need to correct these imbalances and rationalise agricultural support policies to ensure remunerative prices for all the crops produced and promote sustainable agricultural practices.
Challenges to an MSP law
At the outset, farmers are entitled to receive remunerative prices like the producers in any other sectors and MSP is an indicative level of such price. However, legal guarantee of MSP is neither adequate nor practically a viable option to implement.
Even if granted, the legal guarantee may only give provision for punitive action when the transaction takes place at a price below MSP. Implementation of such punitive actions is complex. The fear of such punitive action may discourage buyers to trade in regulated markets when the prices fall below.
Under such a situation, over 80% of farmers with small holdings and low holding capacity of their produce may be forced to sell their produce outside the regulated markets at even lower prices.
Furthermore, the farmers, especially smallholders with limited resources, may not afford time and money to pursue punitive action against erring buyers. This may, in turn, lead to the development of parallel illegal/black markets.
It is also pertinent to note in this context that the average density of regulated wholesale markets in the country is over 450 square kilometres against the optimal density of approximately 80 sq km recommended by the National Commission on Farmers. As a result, many of the small and marginal farmers sell their produce at farm gate to avoid costs and time of transportation to reach distant regulated markets. Such transactions may not even be recorded officially.
Moreover, a legal guarantee of MSP may only address price risk and not assure farmers’ incomes, as the remaining risks will persist. For instance, despite decades of procurement at MSP to an extent of over 60-80% of rice and wheat produced in Punjab and Haryana, farmers’ incomes from crop production per hectare have fallen from Rs.16,349 in 2013 to Rs.12,597 in 2019 and Rs.10,916 in 2013 to Rs.9,092 in 2019, respectively, according to the Situation Assessment of Agricultural Households and Land and Holdings of Households in Rural India (2013 and 2019) by NSSO.
What is the way forward?
The primary objective of agricultural price support policy is to ensure remunerative prices for farmers, while promoting competitiveness in production being an open economy. However, the six-decade-old policy has resulted in promoting production of select crops at high economic costs, while causing environmental pollution and exhaustion of natural resources.
There is an urgent need for reorienting and rationalising agricultural support to ensure remunerative prices for all crops produced by enhancing the bargaining power of farmers. Towards this, it is imperative to devise short-term and long-term policy strategies.
In the medium to long-term, direct marketing linkages with processors and other value chain participants can be enabled by promoting the development of requisite infrastructure, storage and logistics.
In the short-term, farmers incomes and livelihoods need to be protected with a judicious mix of support policies including direct income support (PM-Kisan), price deficiency payment and limited procurement for buffer stocks and public distribution.
Direct income support schemes that usually are provided at the beginning of the crop season for purchase of inputs could be enhanced while doing away with unsustainable subsidies for electricity, fertiliser etc. This can help in reducing excessive use of chemical fertilisers and exhaustion of groundwater resources thereby promoting sustainable production.
In addition, it may also be used to promote the much needed crop diversification from rice and wheat to less resource intensive crops like pulses, oilseeds and other cereals. A study by ICAR-CRIDA shows that net returns from rice cultivation after considering economic costs, subsidies and cost of GHG emissions are much lower at Rs. 8,762 per hectare than the returns of Rs.13,536 per hectare from maize production.
Development of village agricultural markets closer to production points with adequate infrastructure for improving quality, standardisation and certification of produce along with requisite regulated storage facilities is vital and can ensure remunerative prices.
Establishing such direct market linkages can benefit farmers in two ways. First, it will increase marketing margins (share in consumer rupee) for farmers through reduced market intermediaries and enhanced quality with grading & standardisation. Second, farmers will be able to receive information from value chain participants on changing demand and quality preferences and align their crop production practices in line with market fluctuations.
It is also essential to develop regulated warehousing facilities and promote warehouse receipt financing to enable the holding capacity of farmers. Total warehousing capacity under various agencies in the country is about 201 million tonnes, and the demand for agricultural storage is projected to be 436 million tonnes by 2024-25.
The aggregate number of active, regulated warehouses stood at 5,364 with a storage capacity of about 41 million tonnes at the end of December 2024, as per the latest data published by the Warehousing Development and Regulatory Authority (WDRA).
The finance against electronic Negotiable Warehouse Receipt (eNWR) has also not picked up and remained below 1 million tonne in every year since 2011-12. The aggregate quantity of produce that availed eNWRs from 2011-12 to 2023-24 was only about 6.8 million tonnes.
Considering their potential role in enhancing produce holding capacity of the farmers – and thereby increasing their bargaining power for better prices – the regulated warehousing capacity needs to increase and financing of eNWRs needs to be promoted.
Creating a dialogue
More than anything, it is vital to build a continuous dialogue between government and farmers by strengthening and revitalising the agricultural extension system.
The existing system has an extensive outreach network of district level Krishi Vignana Kendras (KVKs) with block level agricultural offices which has been playing an important role in transfer of knowledge and technology to farmers, facilitating its successful adoption on the field.
However, the system can also play a crucial role in creating awareness among farmers about the adverse implications of unsustainable subsidies and support policies that are resulting in degradation of farmers’ land fertility, loss of groundwater etc.
Such awareness will help farmers understand the need for rationalising agricultural subsidies and adopting sustainable production processes. It can also aid in creating a dialogue with policy makers by taking feedback from farmers to policy makers.
The agricultural extension system needs to be strengthened to provide comprehensive information not only on crop production technology and practices but also to establish a policy dialogue with farmers.
All of this can improve farmers’ incomes and promote sustainable agricultural production practices, while ensuring the country’s food and nutritional security.
Amarender Reddy is the joint director of School of Crop Health Policy Support Research (SCHPSR) and ICAR-National Institute of Biotic Stress Management (ICAR-NIBSM), Raipur.
Tulsi Lingareddy is a senior economist at Sustainable Finance and Agriculture, Mumbai.
Views expressed are personal.