Minimum Support Price (MSP) & Budget 2021

GoI declares Minimum Support Price (MSP) for 23 crops before the sowing seasons based on the recommendation of the Commission for Agricultural Costs and Prices (CACP). The idea behind MSP is to give guaranteed prices to the farmers and protect them from market-driven price risks. It insulates farmers from the unwarranted fluctuation in prices caused by the variation in supply (largely influenced by the monsoon and seasonal production), lack of market integration, information asymmetry and other elements of market imperfections that affect the agricultural markets. The guaranteed price and assured markets are expected to encourage higher investment and the adoption of modern technologies in agricultural activities. But the questions arise- whether every crop has been given equal priority in the procurement? Whether, the government is allocating a proportionate budget in the procurement of oilseeds and pulse, similar to paddy and wheat? Whether MSP mechanism is able to regulate the market price of cereals, oilseed, and pulses?
Since, the inception of MSP till 2013-14, Government primarily focused on paddy and wheat procurement. Subsequently, procurement of oilseeds and pulses improved by 15.44 and 73.95 times respectively till 2018-19. Likewise, the Government’s spending in oilseeds and pulses procurement also increased by 17.17 and 98.51 times respectively. Despite these efforts, less than 6% of the produced oilseeds and pulses were procured in comparison to 30% of paddy and wheat between 2013-14 to 2018. As a result, the numbers of paddy (62%) and wheat farmers (74%) were benefitted significantly compared to oilseeds & pulses producers.

Fig 1. Wheat production and Procurement
Fig 2. Paddy production and Procurement

Data shows that between April 2013 to Dec 2019, government procured higher amount of paddy compared to the its’ distribution through the public distribution system (PDS). As a result, excess stock of paddy is still lying in the FCI and government regulated godowns. This brings allocative inefficiency in terms of implementing MSP system and linking it with PDS across the country. Hence, effective mapping of PDS to the crops procurement at MSP is crucial.
Our analysis identifies that the procurement amount of different oilseeds and pulses have remained inconsistent over the year. The regression co-efficient values (Fig.1 & Fig. 2) between procurement and time indicates that the procurement for paddy and wheat improved positively with respect to the years (as for paddy it is 0.92 and for wheat it is 0.53). However, for procurement of pulses and oilseeds, we find that R2 is not significant (as for pulses it is 0.38 in fig. 3). It shows that though procurement of paddy and wheat have been improved over the year, the condition is not same for oilseeds & pulses.

Fig 3. Pulse production and Procurement

It has also been observed that government has limited centres for procurement and related infrastructure support for oilseeds and pulses. Subsequently, the trend analysis for domestic market prices vis-à-vis MSP of cereals (paddy, wheat, and maize) during October 2015 – January 2020 indicates that MSP is able to regulate the market price of these cereals. However, when we perform similar analysis for pulses (Gram) and oilseeds (Lentil, Groundnut, Mustard, and Rapeseed) it shows that market price of these commodities remains highly volatile and MSP fails to regulate them. These findings suggest that along with cereal procurement, the government may increase focus on the procurement of oilseeds and pulses and related infrastructure. If possible, Government may produce a pre-seasonal data list for procurement centres and quantity procured, which may not only motivate farmers in pulse and oilseed production but also control the market price volatility. We also observed that oilseeds and pulses segment are lagging in terms of investment and government also showed capital constraints in last few budget allocations. Hence, it is imperative to get curious whether, government can afford the MSP drive for other remaining recommended crops with its ongoing fiscal deficit situation? This needs further analysis in the aforesaid direction. However, huge funding and investment is required to address the issues mentioned above. GoI have come up with three farm laws recently, leading the opportunity to bring investment from other sectors, but risk associated with these opportunities are always debatable.
Even if government is facilitating MSP mechanism, it is very difficult for smallholders and tenant farmers to avail the benefit of the MSP. This is one of the biggest bottleneck and can be addressed through achieving proper scale at production level i.e. aggregation of the production through FPOs. Although, 10,000 new FPOs creation drive is being successfully implemented by NABARD across the country, however, focus on managerial capacity building for organically grown FPOs and handholding of newly created FPOs are required at the ground level. This will add support to the ongoing MSP system in the country. Apart from this, Govt. may also focus on strengthening the commodity market’s outreach to bring investment into agricultural infrastructure domain. Commodity market’s outreach can be strengthen to cover more and more farmers, FPOs and provide a strong platform for better price realization compared to MSP mechanism.

Fig 4. Investments in Procurement of Wheat, oilseed and pulses

In order to improve the procurement and stocking of the agricultural produce through MSP, the Central Government has improved the budget allocation under Market Intervention Scheme and Price Support Scheme (MIS-PSS) since the FY 2017-18. The actual budget allocation under the MIS-PSS has improved from Rs. 145.69 crore in 2016-17 to Rs. 1810 crore in 2019-20. Government also announced a budget allocation of Rs. 2000 crore under this scheme for the FY 2020-21. However, additional storage capacity created by Central Warehouse Corporation has decreased from 1.62 lakh MT to 0.34 lakh MT between 2015-16 to 2018-2019 (0.95 lakh MT for 2016-17; 0.29 lakh MT for 2017-18). This indicates that a major portion of the allocated fund under MIS-PSS scheme is used for procurement of cereals like paddy and wheat, but the Government need to look after the creation of sufficient storage capacity to stock the excess procurement. In 2020-21 Union Budget government has proposed Rs. 40,000 crores for rural infrastructure development, under which several regulated market yard and warehouses will be created.
We also believe that special efforts are needed to liquidate excess stocks through OMSS(D), higher allocation under Public Distribution System (PDS), and exports through Government-to-Government (G2G) arrangements. The government may focus on ensuring most procurement from small and marginal farmers, for that they may facilitate FPO based procurements and also declare procurement ceiling from the large farmers to overcome the capital constraint and equitable procurement. However, a long way has to be travelled to bridge the gaps between production, procurement and distribution of MSP supported crops in India.

By Mr. Shiladitya Dey & Dr. P. K. Singh; ARF group Members