MSP, procurement and agricultural marketing

Few economic questions in India are as politically charged as the price a farmer gets for their crop. The minimum support price (MSP) is meant to guarantee a floor, protecting farmers from price crashes and encouraging production of crops the country needs. How MSP works in practice — and who it reaches — is a staple of GS III.

How MSP is fixed

• The Commission for Agricultural Costs and Prices (CACP) recommends MSPs.
• The Cabinet Committee on Economic Affairs takes the final decision.
• MSP is announced for 22 mandated crops — including cereals, pulses, oilseeds and commercial crops such as cotton and jute — plus a Fair and Remunerative Price (FRP) for sugarcane, which is fixed under a separate framework.

The CACP considers the cost of production, demand and supply, price trends, inter-crop price parity, terms of trade between agriculture and other sectors, and the likely effect on consumers and the economy.

Cost concepts

Since the 2018–19 Budget, the government has fixed MSPs at at least 1.5 times A2 + FL. Farmer organisations and the National Commission on Farmers (the M.S. Swaminathan Commission) have argued that the benchmark should be C2, which would mean higher MSPs.

Procurement: where MSP becomes real

An MSP matters only if someone actually buys at that price. Procurement is carried out mainly by the Food Corporation of India (FCI) and state agencies, largely for wheat and rice, which feed the public distribution system under the National Food Security Act, 2013.

Procurement is heavily concentrated:

• by crop — wheat and rice dominate; for pulses and oilseeds, procurement is limited and irregular;
• by region — states such as Punjab, Haryana and Madhya Pradesh (for wheat) and several others (for rice) have strong procurement systems, while in many states farmers rarely sell at MSP.

The High Level Committee chaired by Shanta Kumar (2015), drawing on survey data, noted that only a small share of farm households — around six per cent — had sold to procurement agencies at MSP.

Beyond procurement: price support schemes

• PM-AASHA (2018) — an umbrella scheme with components for procurement of pulses and oilseeds (Price Support Scheme), payment of the difference between MSP and market price (Price Deficiency Payment) and private procurement pilots.
• Price deficiency payments were tried by some states, such as Madhya Pradesh's Bhavantar Bhugtan Yojana, which paid farmers the difference between MSP and the market price.

The mandi system

Agricultural marketing is a state subject. Most states regulate markets through Agricultural Produce Market Committee (APMC) Acts.

The intended benefits: regulated markets, transparent auctions, protection from exploitative traders.

The problems that developed:

• too few mandis for the size of the country, making access difficult for small farmers;
• dominance of licensed commission agents (arhtiyas) and traders, sometimes acting as cartels;
• multiple fees and charges;
• restrictions on selling outside notified markets in many states.

Reform steps

• Model APMC Act (2003) and the Model APLM Act (2017) encouraged states to allow private markets, direct marketing and contract farming.
• e-NAM (2016) — an electronic trading platform linking regulated mandis to create a national market.
• Farmer Producer Organisations (FPOs) — helping small farmers aggregate produce and bargain collectively.

The 2020 farm laws

In 2020, Parliament passed three laws that sought to allow trade outside APMC mandis, provide a framework for contract farming and relax stock limits under the Essential Commodities Act. Farmers' unions, especially in Punjab, Haryana and western Uttar Pradesh, protested for over a year, fearing the laws would weaken mandis and procurement and lead to the erosion of MSP. The laws were repealed in 2021. The demand for a legal guarantee of MSP has remained on the agenda.

The debate on a legal MSP guarantee

Arguments for:

• income security for farmers facing volatile prices;
• protection for small farmers with little bargaining power;
• encouragement of crop diversification if MSP is effective for pulses and oilseeds.

Arguments against:

• very large fiscal cost if the government must buy whenever market prices fall below MSP;
• risk of distorting cropping choices and encouraging surplus of some crops;
• implications for WTO commitments on agricultural subsidies;
• storage and disposal problems for procured stocks.

Middle-path proposals include price deficiency payments, better-targeted procurement of pulses and oilseeds, and strengthening FPOs and markets.

Practice questions

1. Prelims-type: Which body recommends MSP? What does the cost concept A2 + FL include?
2. Mains-type (150 words): Why does MSP benefit only a small share of Indian farmers?
3. Mains-type (250 words): Should MSP be made a legal guarantee? Discuss the arguments on both sides.