Parity pricing in agriculture: Rework the MSP regime

India, with vast arable land spanning 400 million acres and 60 soil types, holds the potential for abundant year-round agricultural production. However, the current MSP procurement mainly targets four water-intensive crops—sugarcane, paddy, wheat, and cotton—contributing just over 22% of India’s agricultural output. 

These crops are further promoted by MSPs for yield enhancement and market stability. Cereals dominate farming (58.2% of the cropped area), followed by oilseeds and pulses, with over 20 crops competing for acreage.

Also read: First cabinet meeting of new government to declare MSP for kharif crops

According to the 77th round National Sample Survey, the proportion of households’ farm output sold within the MSP framework varies from 0 to 24.7% (excluding sugarcane). Agriculture ministry data shared in August 2021 indicates slightly over 14% of land-owning farmers benefit from MSPs. 

A September 2021 Centre for Policy Research article reveals that households with over 2 hectares rely on farming for 70% or more of their income, contrasting with under 44% for those with 1 hectare or less. Small and marginal farmers, comprising 89.4% of all agricultural households, primarily earn from livestock and wages, are largely excluded from the MSP system due to low marketable surplus.

Using 2021 MSPs of ₹1,940 for paddy and ₹2,015 for wheat, with yields of 25-30 quintals of paddy and 15-20 quintals of wheat per acre, several reports suggest that Food Corporation of India’s direct procurement costs are at around ₹55,000 and

₹35,000 per acre for paddy and wheat, respectively. Excluding additional expenses of ₹1,300 and ₹1,100 per quintal for storage and transportation over six months, farmers' net income per acre is about ₹10,000-15,000. The government spends two to three times this amount for the farmer’s modest income without accounting for free electricity and fertilizer subsidies. 

Livestock and horticulture, over 50% of agricultural produce, thrive without MSP reliance, growing at 5 to 8%, surpassing cereals’ 1.8% growth over two decades. Total demand, assuming 10kg monthly consumption per Indian and requirement under Seed, Feed, Wastage, and Industry use, falls within the country’s production capacity at about 168 million tonnes yearly.

Also read: Farmers protest: Navigating MSP and food security dilemma

Continued reliance on price supports and input subsidies has promoted monoculture, leading to unsustainable use of natural resources. Punjab's intense wheat and paddy cultivation is depleting water tables by 70-80cm yearly, with 80% at risk and fear looming large that groundwater may deplete to 300 metres by 2039. 

Nationally, issues like waterlogging, acidification, salinization and biodiversity loss have prompted a rethink of current cropping systems for soil health and sustainability amidst climate change concerns.

With evolving tastes, urbanization, and a diverse consumption basket, the demand for non-cereal food items is rising. According to the NSSO’s HCES data for fiscal year 2022-23, both rural and urban Indians allocated more expenditure towards fruits and vegetables than food grains for the first time. Fruit spending also exceeded pulses. This trend is expected to continue as India’s per capita GDP improves.

As per an analysis presented on Statista, in 2023, India’s imports of agricultural and allied products were valued at $37 billion, and the nation witnessed a 40% increase in pulses imports due to consecutive years of lower production. 

India’s total agricultural imports that year amounted to over ₹70,500 crore. A research report by GTRI suggests that India is the world’s largest importer of vegetable oils, with imports estimated to double to $20.8 billion in 2023-24 over the last 5 years.

This is not an exercise in juggling rhetoric and statistics but an attempt to put all pieces of the puzzle together. India's agriculture has ample room for growth, and studying our own and other countries' experiences can guide its path. 

Also read: We must not let Indian agriculture turn into an unending tragi-comedy

Take the case of the US: its agricultural policy has transitioned from traditional price support programmes to direct payments. While complying with international trade standards, we could consider a shift to support mechanisms that are more market-focused for large farmers, while direct payments are made to small and marginal farmers.

Another case to study is the EU’s Common Agricultural Policy—specifically, India can benefit from its emphasis on encouraging agricultural sustainability and adjusting to changing market conditions. 

Further, Brazil’s dual agricultural policy framework highlights another lesson to consider, for it emphasizes the value of customized approaches by providing different pathways for small-scale family farmers and commercial agribusiness. India may use such tactics to support resilience while attending to the various requirements of Indian farmers.

We cannot continue to have a Panglossian outlook. The changing consumption patterns and evolving agricultural landscape necessitate studying the disconnect in the dashboard and drawing board. India's agricultural sector needs a balanced interplay of food security, farmer welfare, and environmental stewardship. Limited land expansion means shifting from food grains to non-food crops is necessary.

Here are some suggestions as food for thought:

First, We need a customized MSP approach for each category of farmers (large, small, and marginal). ‘Feminization’ of agriculture, particularly with small landholdings, is a special case to consider separately.

Second, in place of a fixed MSP, we should try a regional rotational MSP, tailored to diverse factors like plant family, harvested portion, compatibility, fertilizer needs, market conditions, consumer preferences and India’s agri import substitution requirements.

Third, we can incentivize soil health through farmer earnings by front-loading rotational MSPs with incentives for organic activities for soil rejuvenation.

Fourth, we need agricultural R&D for crops like cotton, soybean, groundnut, rapeseed and mustard to make the MSP effective by increasing their yields.

Lastly, taking a 15-year cycle in mind, we should aim for a gradual shift from rotational MSP to market processes, in conjunction with instruments for income stabilization, a partial crop insurance subsidy and direct assistance for smallholder farmers.

These suggestions should be viewed as a bottom-up version update rather than a factory reset. From a farmer’s perspective, it is important to create certainty, as farmers continue to face multiple constraints and deserve better. After all, this is a ‘dal-roti’ matter.

The author is a development practitioner.