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Legalizing MSP: Opportunities and Challenges

Agrarian distress continues to be a significant challenge in India, with farmers seeking a legal guarantee for minimum support prices (MSPs) for 23 crops to mitigate their declining incomes and the growing risks posed by climate change and escalating input costs. However, the fiscal burden and inflationary consequences of implementing a legally mandated MSP system render it impractical.

As alternatives, measures like deficiency price payments (DPPs) and direct income support schemes have been proposed. Effectively addressing these concerns requires a balanced approach that enhances farmers’ incomes while promoting sustainable agricultural practices and safeguarding food security.

Minimum Support Price (MSP)

Introduction:
The Minimum Support Price (MSP) system was introduced in 1965 alongside the establishment of the Agricultural Prices Commission (APC), which was later renamed the Commission for Agricultural Costs and Prices (CACP).
Its primary aim is to ensure national food security and protect farmers from drastic price fluctuations in the market.

MSP Calculation:
The CACP calculates production costs for each crop using three different categories, based on state-level and national averages:

• A2: Covers direct costs incurred by farmers, such as expenses for seeds, fertilizers, pesticides, hired labor, leased land, fuel, and irrigation.
• A2+FL: Includes A2 costs plus the imputed value of unpaid family labor.
• C2: A comprehensive calculation that incorporates A2+FL along with costs related to owned land, rental values, and interest on fixed capital assets.
• While the government claims MSP is set at least 1.5 times the all-India weighted average Cost of Production (CoP), this calculation is based on 1.5 times the A2+FL cost.

Crops Covered under MSP:
The MSP system provides a guaranteed price for 23 mandated crops. Additionally, MSPs are determined for Toria (based on rapeseed and mustard) and de-husked coconut (based on copra).

Arguments in Favour of Legalizing MSP

1. Protecting Farmers Against Market Volatility:
   Legalizing MSP can shield farmers from unpredictable price fluctuations in open markets, ensuring fair compensation despite challenges like surplus production or global trade dynamics.
   For example, in 2024, tomato farmers in Andhra Pradesh faced distress sales due to a price crash. With legal MSP, such disparities can be minimized.
   This is particularly critical as over 85% of Indian farmers are small or marginal, with an average landholding of just 0.36 hectares, making them highly vulnerable to price volatility.
2. Promoting Regional and Crop Equity:
   A legalized MSP can address regional imbalances by ensuring fair remuneration for farmers in underrepresented states and encouraging the cultivation of non-cereal crops like pulses and oilseeds.
   Currently, procurement is concentrated in a few states—80% of the wheat procured in 2021–22 came from Punjab, Haryana, and Madhya Pradesh, while states like Bihar and Odisha were left marginalized. Legalizing MSP would help ensure equitable procurement across all regions.
3. Mitigating Rural Distress and Farmer Suicides:
   In December 2023, NCRB data revealed that 6,083 agricultural laborers in India died by suicide in 2022 due to economic hardships.
   Legal MSP can alleviate rural distress by providing farmers with predictable incomes, reducing dependence on loans, and mitigating the incidence of farmer suicides.
4. Encouraging Agricultural Investments:
   Assured returns through a legalized MSP system can incentivize farmers to invest in advanced seeds, modern technologies, and sustainable practices.
   For instance, the Fair and Remunerative Price (FRP) for sugarcane in 2024–25 was 8% higher than in 2023–24, ensuring profitability and encouraging investments that boost productivity.
5. Reducing Exploitation by Middlemen:
   The 2015 Shanta Kumar Committee report highlighted that only 6% of farmers benefit from the MSP system, leaving 94% excluded.
   Legalizing MSP could help bypass exploitative intermediaries dominating agricultural markets, ensuring that benefits reach more farmers directly.
6. Tackling Climate-Driven Agricultural Risks:
   Climate change has intensified weather unpredictability, increasing risks to agriculture. A legalized MSP offers income stability for farmers affected by crop losses due to extreme weather events.
   For example, unseasonal rains and hailstorms in 2023 damaged over 5.23 lakh hectares of wheat crops across Punjab, Haryana, Uttar Pradesh, and Madhya Pradesh, causing significant yield losses. Legal MSP can act as a safety net in such scenarios.
7. Strengthening India’s Agricultural Exports:
   A predictable pricing regime under a legal MSP framework can help align production with global demand, boosting exports and enhancing India’s global competitiveness.
   For instance, India’s rice exports in 2022–23 totaled $11 billion, with basmati rice experiencing a 21.9% growth in export value for 2023–24. Such measures can help reduce trade imbalances and strengthen India’s position in the global agricultural market
   

Arguments Against Legalizing MSP

1. Fiscal Burden on the Exchequer:
   Implementing a legally mandated MSP for all eligible crops would impose a significant financial strain on the government.
   According to CRISIL Market Intelligence & Analytics, the “real cost” of guaranteeing MSP in the Agriculture Marketing Year (MY) 2023 was estimated at approximately ₹21,000 crore.
   This substantial expenditure raises concerns about fiscal sustainability, given the competing demands on India’s budget.
2. Implementation Challenges in Unregulated Markets:
   A significant portion of agricultural trade occurs outside regulated mandis, making the enforcement of legal MSP challenging.
   For example, Maharashtra’s 2018 attempt to enforce MSP led to trader boycotts, highlighting practical difficulties in monitoring transactions across informal and diverse market channels.
3. Inflationary Pressures:
   Mandating higher crop prices through legal MSP could lead to food inflation, disproportionately impacting economically vulnerable consumers.
   Economists estimate that a 1% increase in MSP could result in a 15 basis point rise in inflation, potentially destabilizing the broader economy.
4. International Trade Implications:
   Legalizing MSP may violate World Trade Organization (WTO) norms on agricultural subsidies, potentially triggering trade disputes.
   India has previously invoked the WTO’s Peace Clause for exceeding subsidy limits on rice, reflecting the delicate balance required to avoid international repercussions.
5. Risk of Inefficient Resource Allocation:
   Legal MSP could incentivize farmers to prioritize MSP-backed crops like rice and wheat, exacerbating issues like groundwater depletion and soil degradation.
   For instance, Punjab and Haryana lost 64.6 billion cubic meters of groundwater between 2003 and 2020 due to the over-cultivation of water-intensive crops.
6. Negative Environmental Consequences:
   The focus on MSP-supported monoculture, particularly of water-intensive crops such as paddy and sugarcane, has contributed to biodiversity loss, soil salinity, and greenhouse gas emissions.
   For example, sugarcane cultivation in Maharashtra consumes 70% of the state’s irrigation water, and legal MSP could inadvertently worsen these environmental challenges.
7. Overburdening Government Procurement Mechanisms:
   Legalizing MSP would necessitate universal procurement, which could overwhelm India’s already stressed storage and distribution systems.
   While India’s food grain production is 311 million metric tonnes (MMT), its storage capacity is only 145 MMT, leaving a shortfall of 166 MMT.
   In contrast, other countries maintain a 131% surplus storage capacity, whereas India faces a 47% deficit, making additional procurement through legal MSP impractical.
8. Lack of Complementary Market Reforms:
   Focusing solely on price guarantees through legal MSP overlooks structural inefficiencies in agricultural markets, such as the limited reach of Agricultural Produce Market Committees (APMCs) and the lack of direct farmer-market linkages.
   India has only one mandi for every 496 square kilometers, far below the National Commission on Farmers’ recommendation of one mandi per 80 square kilometers, leaving many farmers without access to regulated markets.

Arguments against Legalizing MSP

1. Implement a Deficiency Price Payment (DPP) System:
   The government can bridge the gap between MSP and market prices by compensating farmers directly through digital transfer mechanisms.
   This approach minimizes the fiscal burden by reducing large-scale procurement while ensuring fair farmer compensation.
   For example, Madhya Pradesh’s Bhavantar Bhugtan Yojana has demonstrated the feasibility of such a system. Expanding DPP nationwide and integrating it with real-time price tracking platforms can effectively address income disparities.
2. Promote Decentralized Procurement Mechanisms:
   Decentralizing procurement to include state governments and local self-help groups can expand geographical coverage and ensure equitable benefit distribution.
   For instance, Chhattisgarh’s decentralized paddy procurement model has successfully engaged local farmers.
   Such initiatives reduce logistical stress on central storage systems while addressing regional disparities in procurement.
3. Enhance APMC Market Efficiency:
   Modernizing Agricultural Produce Market Committees (APMCs) and linking them with e-NAM (National Agriculture Market) can create more transparent and competitive marketplaces.
   States like Gujarat have improved APMC functioning by implementing Model APMC Act reforms.
   Increasing the number of mandis, integrating digital platforms, and promoting digital literacy among farmers can empower them to secure better prices while reducing dependency on middlemen.
4. Encourage Crop Diversification Through MSP Incentives:
   Introducing higher MSPs for crops like pulses, oilseeds, and millets can shift focus from water-intensive crops such as rice and sugarcane.
   This aligns with sustainable agriculture goals, reducing environmental degradation and over-reliance on monocultures.
   For instance, the government’s millet promotion during the International Year of Millets 2023 showcased how tailored MSP policies can drive diversification and agroecological benefits.
5. Adopt Climate-Resilient Support Mechanisms:
   Link MSP determination to climate risks like erratic rainfall and pest attacks by introducing “climate-smart MSPs.”
   Combining MSP with insurance schemes like PMFBY (Pradhan Mantri Fasal Bima Yojana) can provide farmers a safety net during climate-related disruptions.
   Localized MSPs for drought-resistant crops can mitigate financial losses caused by crop failures.
6. Strengthen Farmer Producer Organizations (FPOs):
   FPOs can pool resources, improve market access, and negotiate better prices for small and marginal farmers.
   Linking FPOs with MSP operations can enhance their bargaining power, reduce reliance on intermediaries, and establish direct market connections.
   This approach aligns with the government’s Atmanirbhar Bharat goal of creating 10,000 FPOs.
7. Integrate Sustainable Practices with MSP:
   Introduce “green MSPs” that reward farmers for adopting sustainable practices like organic farming, crop rotation, and reduced chemical use.
   Making MSP conditional on sustainability metrics can promote environmental conservation.
   Pilot initiatives such as Andhra Pradesh’s Zero Budget Natural Farming (ZBNF) can serve as blueprints for nationwide implementation.
8. Expand Warehousing and Storage Capacities:
   Invest in modern warehousing infrastructure, including cold storage facilities for perishable crops, through public-private partnerships.
   This expansion will address India’s significant storage shortfall, minimize post-harvest losses, and extend MSP benefits to horticulture and other perishables.
9. Integrate MSP with Export Strategies:
   Align MSP policies with export-oriented production to enhance global competitiveness.
   Encouraging MSP-backed crops like basmati rice and oilseeds, coupled with quality certification, can boost agricultural exports.
   This reduces the fiscal burden of domestic procurement while strengthening India’s agricultural trade balance.
10. Develop Crop-Specific Processing and Value Addition Units:
    Link MSP-procured crops to agro-processing industries to enhance value addition and minimize wastage.
    For example, establishing pulse-processing units in major production regions can generate additional farmer income and rural employment.
    This aligns with initiatives like the PM Kisan Sampada Yojana, which aims to improve post-harvest infrastructure.

The discussion around legalizing MSP underscores the intricate relationship between farmer welfare, fiscal responsibility, and food security. Adopting a balanced strategy that incorporates measures like Deficiency Price Payments (DPPs), decentralized procurement, market reforms, and sustainable agricultural practices is essential to achieve mutually beneficial outcomes for both farmers and the government. By tackling core challenges such as market inefficiencies, climate vulnerabilities, and income disparities, India can establish a resilient and inclusive agricultural system that benefits all stakeholders.

The End of the Blog: Legalizing MSP: Opportunities and Challenges