The Importance of Guaranteed MSP in the 2024 Lok Sabha Polls

As the electoral contest gathers momentum, agrarian issues are receiving the attention they deserve, albeit with differing emphases, depending on which side of the political spectrum the contestant is positioned. On the most critical issue of fair and remunerative prices for agricultural produce, captured in its essence by the demand for a legally-guaranteed regime of Minimum Support Prices (MSP), parties have been forced to take a stand.

While the Congress has fully supported the demand, the ruling dispensation, sensing adverse electoral implications, has made efforts to engage with farmers by expressing its readiness to procure pulses, maize, and cotton at MSP, but contingent upon farmers guaranteeing crop diversification.

What was once a question of ‘why’ a legally guaranteed MSP is necessary has now shifted towards the ‘how’ of it, instilling hope that a resolution to the farmers’ core concerns may be in sight.

A comprehensive legal framework 

Illustration: Pariplab Chakraborty

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A straightforward amendment to the State Agricultural Produce Marketing Committee (APMC) Act or the Centre’s Essential Commodities Act would suffice to establish a law ensuring that no purchase of farmers’ produce occurs below the MSP along with penalties and punishments for violations. Alternatively, the Union government could enact a law in parliament to harmonise regulations nationwide. However, there is apprehension that such “punitive” enforcement would not only be difficult to administer but may also prove to be counterproductive from the farmers’ own point of view. Some have also argued that such a mechanism through legal recourse is too “minimalistic” as it lets the government evade its responsibility for ensuring MSP. Both apprehensions require clarification.

Any law, by design, must incorporate punitive measures for violators in order to deter infractions. Not only must traders who purchase below the MSP be held accountable, but also administrators who operate the marketing system and facilitate such transactions ought to be made to face consequences. The Karnataka Agricultural Prices Commission (KAPC), the country’s first advisory body of its kind in the states, outlined a clear roadmap in its 2018 report. This included potential financial commitments to ensure a legally binding support price, referred to as the ‘Statutory Minimum Procurement Price,’ for crops cultivated in the state.  

Crucially, the KAPC had emphasised the development of backward and forward connections, the most critical being the timely and adequate procurement by the government. Crop planning, market intelligence (including price forecasts), and other pre-sowing measures, along with the establishment of post-harvest infrastructure for efficient storage, transportation, and processing of farm commodities, are all measures that are necessary to operationalise an assured MSP regime. Such measures would effectively resolve the perennial problem of post-harvest gluts in the market. 

The KAPC had even proposed legislation to ensure that the government bears the primary responsibility, by compulsorily procuring food commodities at MSP for welfare programmes such as the PDS, Anganwadi, mid-day meal for school children, and various targeted initiatives for vulnerable children and women groups as envisaged under the ‘National Food Security Act 2013’. Although the question of the potential burden on the exchequer is valid, it’s crucial to balance it with the state’s responsibility to address both the needs of the malnourished poor and the plight of distressed farmers. This underscores the importance of the effective coordination of market mechanisms as well as government intervention, ensuring that they are acting in unison, particularly in food commodity distribution in a country like India. The success or failure on either front defines the burden on the government exchequer, necessitating clarification on the so-called surplus or glut that often surfaces while striving to secure remunerative prices for farm commodities in India.

Also read: Demand, Policy, Empty Promises: Why We Must Compare Congress and BJP’s Agri Manifestos

Surplus, a misnomer 

The existence of surplus farm commodities is often ‘contextual’, driven mostly by the seasonality and the region-specific nature of production rather than a simple mismatch of demand and supply as often proclaimed by adherents of the free-market ideology. This surplus is typically confined to the period immediately after the harvest, particularly in markets close to the production regions, and is therefore ‘temporary’. The apparent inability in deliver farm commodities to consumers across both space (via transportation) and time (through storage), coupled with inadequate processing, which extends longevity and transferability, often results in the misleading perception of what is termed as a ‘surplus’. This highlights a failure of market mechanisms, particularly acting through price signals, to efficiently allocate food commodities to meet the needs of consumers.

This becomes evident when examining the aggregate production and requirement for essential dietary farm commodities in a country like India. The per capita availability of food commodities in recent years indicates a slight shortfall in pulses and edible oil compared to the actual recommended dietary requirements for the entire country’s population of around 144 crores, with cereals being the exception. For instance, according to institutions dealing with food and nutrition, an adult should ideally consume between 300 to 400 grams of cereals, 60 grams of pulses, and 30 grams of oilseeds daily to maintain a healthy lifestyle. However, in 2023, the actual per capita availability was 557 grams of cereals, 47 grams of pulses, and 29 grams of oilseeds. This suggests that while there is enough food available, it is not in surplus in India. (Figure I below). 

Per-capita Availability and Recommended Quantity of Essential Food Commodities in India (grams/day)

Budget is not unaffordable 

There is also an argument that if private traders fail to adhere to the legally mandated MSP, the government may be forced to procure all the produce, potentially adding to the perceived burden on the exchequer. This notion lacks substance and is grossly exaggerated, perhaps in order to depict those demanding a legally-guaranteed MSP regime as being fiscally reckless. This is because the essential food commodities must be continuously available for consumption, necessitating transactions that cannot be halted due to legal guarantees. Furthermore, a decisive message of government intervention would stimulate market dynamism, while ensuring price recovery, a critical objective of a fair marketing system. Hence, there would always an ‘optimal’ level of intervention, which would be sufficient to stabilise prices in the open market that are above the legally-defined MSP, but which is achieved without excessively straining the government exchequer. Achieving this requires an openness and a willingness to engage proactively to address the ground realities.

The interval between October and February, spanning five months, is the peak arrival period for crops sown during the Kharif season. Similarly, the four months between March and June are critical for Rabi crops. During these periods, farm commodity prices generally tend to trend downwards due to the post-harvest depression effect. An analysis of price trends over the past five years across major markets in different states reveals that the prices of specific crops have consistently stayed below the MSP for a relatively brief period of around three months during the critical periods cited earlier.

This downward trend was observed in only three out of the five years for crops with an MSP in place. Logically, therefore, it is improbable that prices of all commodities would simultaneously dip below their MSP levels within a given year. It is obvious that that government intervention to stabilise prices of food crops may not be as extensive as is often claimed. However, it is evident that state intervention must exhibit flexibility in both setting prices and determining the quantities procured, responding proactively to real-time market conditions. 

The actual quantity of the output that enters the market immediately after harvest depends on the farmers’ withholding capacity, which is especially affected by their dire financial situation. Based on indices of arrivals, a common observation suggests that this quantity typically does not exceed more than 25% of the production of a particular crop in question. Indeed, the actual quantity of crop output experiencing a price fall below MSP during the critical period depends on numerous factors: the nature and extent of competition in the market, the extent of market infrastructure, import and export policies, among others. Even in a scenario in which these factors do not favour farmers, which necessitates government procurement to ensure the MSP, the strain on the exchequer would not be as unbearable as it is made out to be in some quarters.

The Price Support Scheme (PSS) under the government’s PM-AASHA (Pradhan Mantri Annadata Aay Sanrakshan Abhiyan) has established a clear provision to procure 25% of the actual production in the event of a price fall in a crop that enjoys MSP. However, apart from paddy and wheat meant for the PDS, the actual procurement of other crops that have an official MSP remains far from satisfactory. While cereal procurement does exceed 25% (approximately 28% of the total production in recent years), it is primarily limited to paddy (44%) and wheat (23%), and that too predominantly in a few northern states. Procurement of pulses accounts for hardly 11% of total output, and that of oilseeds is just 4% of the production. 

Table: Financial Requirement to Ensure MSP for Essential Food Crops in India

Source: Department of Agriculture & Farmers Welfare, GoI, Advance Estimates of Production for 2023-24
Note: 1. MSP for Horticulture crops are estimated based on the cost of cultivation from report of KAPC, Govt. of Karnataka, 2023
2. MS Swaminathan MSP is extrapolated from CACP data as per the formula: Cost C2 + 50% of Cost C2

The MSP is announced annually for 23 crops grown in the Kharif and Rabi seasons, 21 of them being food crops. The above Table presents details of production and the MSP declared for 21 food crops in recent years. As observed, the total cost of procuring 25%

of the output of these crops amounts to approximately Rs. 2.56 lakhs. Furthermore, enhancing the MSP to provide a 50% profit margin over the total cost (Cost C2), as recommended by Swaminathan, comes to around Rs. 3.23 lakhs, which is not excessively challenging, given that current margins already stand at around 16%. Moreover, despite their importance, staple vegetables like potato, onion and tomato are not yet part of the MSP regime. To ensure prices equivalent to MSP for these vegetables, an additional budget of about Rs. 50-75,000 crores may be required. 

The 21 food crops mentioned above forms almost 99% of total production cereals, pulses and oilseeds put gather. The three major vegetables considered here forms more than half of the vegetable output. When combined with the budgetary requirements to ensure MSP for all crops, including major vegetables as per the recommendations of the Swaminathan Commission, the total could reach a maximum of Rs. 4 lakh crores (Figure II a and b). The inclusion of vegetables would take the total to about Rs. 4.75 lakh crores. 

Figure II (a). Cost of Procuring 25% Essential Food Commodities (Rs. Crores)

The 21 food crops mentioned above constitute almost 99% of the total production of cereals, pulses, and oilseeds combined. The three major vegetables considered here account for more than half of the overall output of vegetables. Sugarcane already benefits from a guaranteed statutory MSP in the form of a Fair and Remunerative Price (FRP). For other major vegetables and most fruit crops, either extending procurement or compensating for the price differential (between MSP and the market price) through implementing Bhavantrar as envisioned under PM AASHA’s scheme would not significantly increase the total budget, which is expected to be around Rs. 5 lakh crores. This sum ought to be placed in a proper context: it is just about one-tenth of the total size of the recent Union budget of about Rs. 45 lakhs crores.  

Figure II (b) Cost (%) of Procuring 25% Essential Food Commodities at MSP

It’s worth noting that government procurement isn’t necessarily a burden; instead, it can serve multiple purposes. Welfare programmes under the National Food Security Act 2013, as mentioned earlier, require large quantities of various food crops. Moreover, there is ample scope to further expand their reach. In an ideal scenario, the procured produce can be stored and sold when prices recover, potentially even with a profit margin. Even in a worst-case scenario, where market prices fail to recover even as a result of storage, the cumulative difference between the procurement price (i.e., the MSP) and the market price for all 23 crops amounts to a modest loss of ranging from about Rs. 21,000 crores and Rs. 26,000 crores in recent years, according to reports, including one by CRISIL Market Intelligence & Analytics.

Therefore, an optimal approach could involve the government procuring 25% of food commodities, while the remaining 75% is traded in the open market with competitive price discovery. Meanwhile, caution must be taken to rely on accurate production data, as they are often underestimated. Therefore, basing 25% procurement on inaccurate data may create problems, as seen in the case of copra procurement in Karnataka in recent times. 

Non-food commercial field crops left out from the above analysis include crops like cotton and tobacco. Existing institutional arrangements such as the Cotton Corporation of India and the Tobacco Board are capable of ensuring MSP for these crops. Additionally, for plantation crops, government procurement may not be necessary as the primary issue lies in price stabilisation due to scenarios such as adverse trade situations. In such cases too, implementing a legal MSP that addresses issues such as a minimum import price against possible import surges, which often occur in plantation crops like areca nut and spices, may suffice. All these measures could potentially satisfy both advocates of a free-market economy as well as proponents of government intervention, as long as interference from intermediaries, or their acting in collusion, is effectively controlled. Needless to say, the regime can always be fine-tuned after it is in place; allowing frivolous objections to obstruct its very implementation is patently unfair.  

Cost of procurement in order to ensure MSP for major food crops.

Meddling by middlemen

The timeliness of intervention is as crucial as the quantity of intervention and any delays in procurement can significantly impact farmers’ price realisation. Due to the lengthy procedure of obtaining prior approval from the Centre, state governments’ ability to intervene promptly in order to arrest price drops is often compromised. 

Additionally, collusion between unscrupulous middlemen and those responsible for administering the marketing system, may lead to delays in government intervention, exacerbating the distress faced by small and poor farmers. These factors often compel farmers to engage in distress sales of a significant portion of their produce even before state procurement can commence. For example, in recent years in Karnataka, even with a well-established APMC system and e-trading facilities, more than 40% of major pulses and oilseeds were sold before government commenced procurement operations. This not only sheds light on who benefits from such large-scale distress sales but also highlights the inherent apathy of the establishment to address the issue of timely intervention, especially when it does not incur any budgetary strain on the government. 

Furthermore, an analysis of the ‘retail markup’ over wholesale price levels reveals the disproportionately larger share acquired by intermediaries in the price ultimately paid by consumers for food commodities. Despite farmers receiving meagre prices that are well below the MSP at wholesale markets, consumers end up paying significantly higher prices in the retail market. For instance, rice prices in Karnataka see a 120% markup when they reach consumers. Similarly, gram prices in Tamil Nadu surge by 130%, and onion prices in Madhya Pradesh soar by a staggering 210%. This disparity highlights the historical existence of a pricing racket in the market for farm produce. Under such circumstances, farmers typically receive no more than 30% of the price paid by final consumers. Legalising MSP will undoubtedly boost farmers’ share of the final price paid by consumers, which would potentially encroach upon the profit margins of intermediaries.  

Political Expediency 

Amidst the bottlenecks and hurdles, the lethargy in distributing food commodities to the hungry and malnourished masses presents a glaring failure of governance. India is home to approximately one-fourth of the world’s hungry population. A significant portion of women, children, especially young girls, in India suffer from anaemia and malnutrition. These alarming statistics persist despite an elaborate Public Distribution System (PDS) and the comprehensive National Food Act of 2013. Given the failures stemming from both government policies and market mechanisms in effectively utilising food commodities, penalising farmers on the pretext of ‘excess supply’ by denying them remunerative prices, is an absurd position to adopt.

The Congress-led UPA (United Progressive Alliance) government undertook a commendable step in addressing the twin evils of hunger and malnutrition by establishing the comprehensive National Food Security Act in 2013. Credit must also be given to UPA (II) for establishing the National Commission on Farmers, led by renowned agricultural scientist MS Swaminathan in 2007, which proposed a genuinely remunerative support price system for farm commodities. 

On the other hand, the BJP-led ruling dispensation, seemingly sympathetic to both the trading class and agribusiness companies (including prominent entities like Adani, Ambani, and Patanjali), adeptly employs strategies primarily centred around Hindutva, while effectively diverting attention from the grave issues confronting farmers. Furthermore, given the unabashed commitment to unrestricted liberalisation and globalisation that is common to most political parties, any form of government intervention, especially a legally binding MSP regime, is deemed anathema. 

In conclusion, despite the clear ethical imperative and the eminently feasible viability of implementing an MSP regime that establishes a guaranteed floor price, the primary hurdle lies in political patronage of deeply entrenched exploitative intermediaries, coupled with a steadfast adherence to anti-farmer neoliberal policies. Addressing these challenges is crucial for meeting the just and legitimate demands of farmers. The Lok Sabha election will serve as a litmus test to determine whether political compulsion outweighs political expediency, depending on how effectively issues confronting farmers are articulated.

T.N. Prakash Kammardi is an agri-economist and former chairperson of the Karnataka Agricultural Prices Commission, the first of such commissions established at the state level.