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  • Shikhar Nathani

MSP and Beyond: Reforming India's Agrarian Economy

On the eve of independence, the Indian economy was dependent on agriculture, which generated 70% of income and supported 85% of the population residing in villages, directly and indirectly.

The dismal features of Indian agriculture were - (i) Low productivity, (ii) High Vulnerability and (iii) Stagnancy. These characteristics stemmed from dependence on natural sources for irrigation, fragmented land holding, technological dependence and backwardness.

Dire need for MSP

Despite an agricultural growth rate of 2.5%, we were dependent on food imports and faced a situation of “ship to mouth” in turbulent times during the first three five year plans. The failure of monsoon in 1965 and 1966 increased dependence on external food aid ‘PL-480’ programme. During the 1965 Indo-Pak war, US threatened to stop food aid under PL-480. This initiated public policy focus towards achieving food security.

C. Subramaniam, the then agricultural minister, adopted a new strategy to boost agricultural production accompanied with remunerative price support scheme (MSP) for farmers. In January 1965, the Agricultural Price Commission was set up to recommend Minimum Support Price (MSP). India introduced high yielding varieties of seed from Mexico in Punjab, Haryana and Western UP, where public investment in irrigation under Britishers had paid rich dividends. By 1971-72 India became self-sufficient. Introduction of HYV seeds was successful because of public investment in fertilisers, credit, irrigation and power.

Apart from achieving food security, MSP policy ensures that farmers do not face the wrath of international price fluctuations. It also ensures food grain supplies under the National Food Security Act (NFSA) and Targeted Public Distribution Scheme(TPDS) programme, covering about two thirds of the total population. India’s food exports have reached a new milestone by crossing $50 billion in the financial year 2022. It also increases farmers’ disposable income, which can be used for adopting new technology and in achieving the government’s target of doubling farmers’ income by 2022.

MSP was launched to act as a cushion and protect farmers against the backdrop of adopting HYV technology and encourage them to adopt new HYV technology. Today about 2% of GDP is spent on farm subsidies, leading to the obvious question - Has MSP lived beyond its years after the initial objectives have been fulfilled?

How far is the destination ?

A blunt knife does not make a great weapon. As per International Food Policy Research Institute (IFPRI) returns from public expenditure are highest on R&D and least on fertilisers subsidies, irrespective of this overall farm subsidies account for about 2-2.25% of GDP whereas R&D’s share is about 0.6% of GDP. Fertiliser subsidies stood at Rs. 1,62,132 crores in 2021-22.

Procurement efforts have been encouraging in case of cereals like wheat and rice ‘only’. This has led to serious imbalances and distortions in production. Estimates show that 40% of total geographical area is degraded due to intensive multi-cropping round the clock. As a result, to keep up the productivity at the same levels, there is an increased use of fertilisers, increasing pressure on the government budget, as Indian farmers enjoy fertilisers at cheap prices, thanks to farm subsidies.

Increased use of fertilisers requires sufficient amounts of water to dissolve nutrients into soil. This has caused increased incidences of water scarcity. As per Minister of State for Jal Shakti, 78% blocks in Punjab are overexploited and facing serious water issues. The procurement in states like Punjab, Haryana, MP, UP far exceeds the buffer stock limits, to be distributed under NFSA and TPDS, set by the government, diverting food grain from the market. Export of grains by Food Corporation Of India (FCI) at price lower than reserve price (minimum price seller would be willing to accept, during absence of subsidies) would imply export subsidy, and will expose India to disputes in multilateral trade.

Fertiliser subsidy during the first five months of the current fiscal has reached ₹61,449 crore.
(Source: Hindu Business Line)

India imports about 60% of its consumption of edible oils and about 50% pulses. Although MSP has been increased considerably for both these goods, still farmers aren't motivated for production due to less procurement efforts and as they are not a part of the PDS.

As per 70th round of NSSO, only 23.72% of rural households are aware about MSP and its benefits are accrued to about 20-25% of ‘rich’ farmers only.

In India MSP is dependent on cost of production and is recommended by the Commission for Agriculture Cost and Prices (CACP). MSP boosts land rental value, labour and management cost, leads to higher cost of production and therefore MSP, like wage-price spiral. MSP is also used by the government for political gains. Between 1995-2001, the government set MSP higher than recommended by CACP for 4 out of 7 times for rice and 5 out of 7 times for wheat.

As per the High Level Committee on restructuring FCI, the centre should not accept grains from states in the central pool, who are giving bonus on top of MSP and government should offer better price support and administrative machinery for procuring pulses and oilseeds. The government should offer direct cash subsidies to farmers (Rs. 7000/hectare) to avoid leakages and deregulate the fertiliser industry. Farmers should also make a move towards organic farming, as achieved by the state of Sikkim.


India is in an exceptional situation, where on one hand we are self-sufficient in food grain production and on the other facing high food inflation due to the government being the largest buyer to provide for NFSA and TPDS. FCI is suffering from diseconomies of scale.

A toddler is spoon fed upto a certain age only. Although MSP provides immense support to ‘some’ farmers, it might be high time to move towards avenues of investment which provide higher return on investment. A gradual, rather than a radical shift, will help every stakeholder to adjust with changing needs of the time. More importantly, it is high time for our policy makers to move away from populist policies.

By Shikhar Nathani

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