Agriculture in India has a lot of uncertainties with many uncontrollable variables which makes it risky for producers. The challenge for policymakers is that on one hand there is a distressed farming community that rightfully demands a dignified and financially viable life, and on the other, there is a massive population whose nutritional needs have to be met through affordable and accessible food. Further, we have to do so while being responsive to a worsening water crisis and being adaptive to climate change.
Across the globe, governments support farmers because of concern for food security. The support is provided through various mechanisms - cash transfers, input subsidies, insurance, and price support. In India, agriculture is supported across all the four ways mentioned above. Some examples include cash transfers through Pradhan Mantri Kisan Sammann Nidhi, input subsidies for fertilizers, electricity, etc., and Pradhan Mantri Fasal Bima Yojana (PMFBY) for crop insurance.
In India, there is the Minimum Support Price (MSP) declared for 24 crops and a public procurement system that backs it as a price support mechanism. It was established in the era of food insecurity to incentivize and de-risk farmers to produce crops for the country. GOI procures about 30% of all wheat and rice produced in the country (for market and subsistence) and about 6-7% of other commodities. Wheat and rice procurement has increased over the decades; in the 1970s, GOI used to procure only about 10% of grain output, but now it is around 30%. Many agricultural commodities, usually perishable, for which Minimum Support Price (MSP) is not declared are covered under Market Intervention Scheme (MIS) by NAFED. The existing MSP/assured price system covers 25 million-plus farmers across all crops, including pulses and oilseeds.
While the system has worked in some ways, there is a recognition that its design and implementation are skewed across regions and crops. First, it has uneven spread in crops, geography and farmers. More than 80% of MSP is going to wheat and paddy. A large portion of the total paddy-wheat procured for the central pool comes just from a few states like Punjab and Haryana. Even within these states, procurement takes place only in a small number of districts. There are also concerns about the uneven spread of procurement in terms of a larger volume of procurement from larger farmers as compared to small and marginal farmers.
In addition, the procurement of crops also sees many operational challenges including the timing of procurement, payment to farmers, and differential state capacities and there are also many debates about the cost calculations for MSP itself. The government’s weak distribution capability means that there is no smooth exit mechanism for procured crops without causing market disruption. The current MSP and procurement regime has incentivized the practice of intensive monoculture of high yielding varieties of paddy and wheat. As a result, the land is diverted from many other crops towards rice and wheat. Due to open-ended procurement, there is a significant overflow of buffer stocks. The production of rice and wheat has exceeded our needs.
Rice is India’s largest agricultural export leading to the transfer of billions of litres of virtual water. The declining water tables in many parts of the country indicate the big challenge in front of us. Our PDS system consists primarily of rice and wheat but rarely pulses and oil. There are other price support mechanisms that do not involve procurement such as Price Deficiency Payment launched by the Madhya Pradesh government or the crop insurance mechanisms that protect against price risks that have evolved in the USA. Regulating imports and exports are other ways in which the government influences the prices of commodities.
There is consensus that the MSP must evolve to serve the current and future needs of farmers, consumers, and the environment. The GOI too has now committed to continuing price support through MSP. Designing a forward-looking mechanism needs to address challenges of farmer incomes, production variability, exclusion in procurement, fiscal burden, state capacity, international commodity markets, environmental degradation, nutrition requirements, food security, quality, and balance in production.
There are different schools of thought on the pathways forward. The current protesting farmers seek legal assurance about farmers receiving MSP for all their produce. They would like to make MSP universal, legalise it and make the traders buy at MSP as a benchmark price. To ensure the benefits of MSP reach the most moralised after it is legalised, several reforms to resolve failings and improve coordination in the government machinery.
There is a point of view related to the above, that believes that the decisions on MSP and procurement should be decentralized to the states and possibly even further to the districts. Their agricultural plans, which are supposed to take into account economy, ecology, nutrition, and other local factors, should determine priority crops, production of which should be encouraged and what would be the quantitative quota that the government will support. At the central level, the funds can be devolved in a proportionate manner. These can also feed into the local PDS and nutrition schemes.
To solve for nutrition deficiencies, there are advocates for expanding the PDS basket to pulses and oilseeds. The procurement should be linked to food schemes (PDS, MDM, ICDS), collectives such as SHGs and FPOs which could be used to strengthen rural markets and improve the diversity of foods, especially in rain-fed agriculture settings.
The other school of thought believes that the states do not have the right capacity for managing procurement, storage and distribution. The procurement of crops is financially and operationally unsustainable. They also have to deal with high political interference at all levels. They point to the fact that producers of high-value crops like horticulture, poultry, and other perishables have done without MSP and these areas are the fastest growing areas in agriculture today. They believe that the way forward should involve less physical procurement. Instead of a price support guarantee, it should aim for income support with direct benefits payment and newer ways to discover price such as futures trading. Moreover, global markets are opening up for Indian farmers and legalizing MSP will prevent farmers from competing in global markets. MSP, if it needs to be used, should be used in a very limited and targeted manner such as to improve pulses and oilseeds production.
Which pathway is the way forward? Opening up markets with higher participation from private players, cooperatives, and other players? Or legalizing MSP? Do we need a close-ended procurement system - say limiting procurement up to 5 acres of production per farmer? Or decentralizing procurement and distribution for PDS to the states?
This isn’t just a technical challenge but it also needs to consider the politics of food-food inflation, changing dynamics of the centre-state relationship, the emerging role of big businesses and subsequent transitional pain of changing policies. For these reasons and more, the future of the MSP is a classic 'wicked problem' that requires people who hold different viewpoints to go beyond debating.
<aside> 💡 A wicked problem is a problem where there is no single solution to the problem; and due to complex interdependencies, the effort to solve one aspect may reveal or create other problems.
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The Wicked Sprint on MSP for the Future provides the space for influential stakeholders representing all viewpoints to engage in a deeper and deliberate understanding of each other to co-create ways forward.
The following experts on the issue of MSP were consulted in preparation for the Wicked Sprint and this note. Names are in alphabetical order: