‘MSP guarantee can nudge farmers to diversify beyond paddy and wheat, bolster incomes and consumption’

Farmers carry paddy saplings for plantation in a field, in Nadia, Friday, Feb. 9, 2024.

Guaranteeing a Minimum Support Price (MSP) across crops will support farm incomes and push consumption demand¸ CRISIL Market Intelligence & Analytics said on Tuesday, estimating that the “real cost” of such a guarantee for the government would be around ₹21,000 crore in the agriculture Marketing Year (MY) 2023.

Noting that MSP-based procurement is currently only done in a few States—Uttar Pradesh, Punjab, Telangana, Madhya Pradesh, Haryana and Chhatisgarh—the firm said an MSP guarantee will percolate the benefit to farmers across the country.

While procuring the entire production of 23 crops, for which an MSP is announced, would mean “materially higher” spends for the exchequer, CRISIL’s research director Pushan Sharma said the government will procure only those crops whose mandi prices are lower than the MSP.

“Our calculations show it will need a working capital of around ₹6 lakh crore in MY 2023. The real cost to the government, though, will be the difference between MSP and mandi prices, which works out to around ₹21,000 crore for MY2023,” Mr. Sharma said. CRISIL factored in 16 of 23 crops, which account for over 90% production of the field crops, for its analysis.

The cost could be higher if the government offloads the commodities in mandis because then prices could fall further than what was seen in those markets in 2022-23, on the basis of which CRISIL worked its calculations. In MY 2023, eight of the 16 crops traded above the MSP while eight traded below the MSP.

“For farmers, it would mean cash support during times when prices plummet below MSP. It will also give them the freedom to sow crops of their choice and be more amenable to their local conditions,” Mr. Sharma said, stressing that among 23 crops with MSP, meaningful procurement only takes place in paddy and wheat. This explains why over 60% of field crop production in India comes from only these two crops (excluding sugarcane), as farmers lack risk appetite for other crops.

“If we look at kharif 2022 and rabi 2023, 41% of the paddy and 24% of the wheat produced during the year was procured. Next came mustard, where 9% of production was procured. For five crops, procurement was less than 3% of the production,” he said. “In this milieu, guaranteeing MSP for all crops can lead to farmers moving to crops other than paddy and wheat, which see the maximum procurement,” the CRISIL research director underlined.