Reigning in Minimum Support Prices in India

Agriculture has not been a top priority for the Narendra Modi administration but nevertheless there have been some policies that have been proposed. The major one perhaps being a new crop insurance scheme, the Pradhan Mantri Fasal Bima Yojana (PMFBY), which offers farmers crop insurance at as low a rate as 1.5%. Apart from that however, there aren’t any major specific agricultural policies being pursued. Recently however, the central government made an announcement that can have strong implications. That announcement being of curbing states’ power while declaring bonuses above the centre-decided minimum support prices for wheat and rice. Before getting into the why, a brief overview of minimum support price would help us understand the reasons for this move better.

Overview of Minimum Support Price (MSP)

Minimum Support Price (MSP) is a form of price control used by the Indian government to regulate the prices of crops. By setting a guaranteed price for certain crops, the aim is to ensure that the Indian farmer remains secure in the face of potential low price fluctuations on their crops. This is important when it comes to India specifically, since the vast majority of Indian farmers are marginal or small farmers (around 85%c combined according to the 2010-11 Agricultural Census) , who are not able to grow multiple crops. The price of the crops they produce being low could easily jeopardize their financial security and the MSP aims to counter this threat. Furthermore, linked to the MSP is the procurement price that the central government agency, Food Corporation of India uses to procure crops for the public distribution system. 

The minimum support price was introduced during the Green Revolution in the 1960’s. The inception of the agricultural prices commission, today known as Commission for Agricultural Costs & Practices, in 1965, was to help the government in determining their policy on crop prices and they currently determine the MSP for the government.

The need for a tool like the MSP emerged due to the developments during the Green Revolution. A lot of the technologies that were introduced were only affordable to own and maintain by rich farmers, who are few in number in India, even today. With the increase in production due to these new technologies, crop prices would reduce, ultimately harming the small farmer much more. A tool such as the MSP would hence aid not only smaller farmers who could otherwise be squeezed out of the market, while also acting as a safety net for farmers who could enterprise, to adopt new technologies.

Why Limit States’ Power Over MSP

MSP in theory has been sound. In fact, the central government isn’t about to drop MSP altogether. Only certain crops such as rice and wheat that have heavily been favored when it comes to MSPs and bonuses by state governments are being targeted. High MSPs and bonuses for these crops creates an incentive for farmers to increase production of those crops, which is fine but an increased focus and production of only these crops leads to problems in the environment, sustainability and even food and nutritional security to an extent.

For instance in Punjab, where despite there being a groundwater issue, MSPs for rice are higher compared to other crops. Or, how high MSPs have been found to play a role in the increase of food prices for the public, hindering India’s attempts at food and nutritional security. Furthermore, with increased production comes a higher price that the government must pay for those crops, which burdens the government with even more subsidies.

Potential Impact of the Decision

The impact would serve much more as a gateway to future policy changes rather than any immediate impact. Essentially, MSP inhabits a somewhat central role in the economics of Agriculture in India. After all, the MSP has major impacts on the market forces. It has been misused as a policy tool over the past, which have contributed to the problems of sustainability, food and nutritional security and subsidy burdens for the government. Politically also, the reduction of MSPs scope has not been prescient. For this reasons, reigning in states’ ability to play with MSP sends a strong signal for future possibly comprehensive policies being pursued by the government when it comes to agriculture.