Minimum Support Prices for Agricultural Produce

[op-ed snap] An Answer To Rural Distress


Mains Paper 3: Agriculture | Transport & marketing of agricultural produce & issues & related constraints

From UPSC perspective, the following things are important:

Prelims level: APMC Act, Basics of MSP, Agriculture Schemes.

Mains level: The newscard discusses issues, related to the Rural distress and ways to resolve it, in a brief manner.


  • There’s nothing new about rural distress. Nor is it surprising. The issue is as much political as it is economic.
  • A systemic crisis in farming goes back to probably the entire post-reform period.
  • Rural India’s deepening distress unfolds against the canvas of policy-driven inequality over the past two decades.

What’s the problem?

  1. The monsoon behaviour has been very erratic and farmers have been facing the problems of severe drought for the past few years.
  2. Fortunately, there is a bumper crop [unusually large crop growth and harvest] this year, but farmers are not satisfied with the procurement price.
  3. They are, therefore, unable to repay loans they have taken, both from institutional sources and private moneylenders.
  4. And without doing so, they will not be eligible for fresh credit for the Rabi [winter] crop. This is one of the reasons why they have been demanding a loan waiver. 

Why the crisis?

  • The main reason for farm crises is the rising pressure of population on farming and land assets.
  • Government data show the average farm size in India is small, at 15 hectare, and since 1970-71, there has been a steady declining trend in land holdings.
  • The small and marginal land holdings (less than 2 hectares) account for 72% of land holdings, and this predominance of small operational holdings is a major limitation to reaping the benefits of economies of scale.
  • Since small and marginal farmers have little marketable surplus, they are left with low bargaining power and no say over prices.
  • Risk because of pests, diseases, shortage of inputs like seeds and irrigation, which could result in low productivity and declining yield; the lower remunerative price; the absence of marketing infrastructure and profiteering by middlemen adds to the financial distress of farmers.
  • Also, the predominance of informal sources of credit, mainly through moneylenders, and lack of capital for short term and long term loans have resulted in the absence of stable incomes and profits.
  • Farmers face price uncertainties due to fluctuations in demand and supplyowing to bumper or poor crop production and speculation and hoarding by traders.
  • The costs of farm inputshave increased faster than farm produce prices
  • The absence of a robust market for buying and selling forward-looking contracts
  • Uncertain policies and regulations such as those of the Agricultural Produce Market Committee, besides low irrigation coverage, drought, flooding and unseasonal rains, are some other factors that hit farmers hard.


Three significant solutions have been doing the rounds:

  1. Higher minimum support prices (MSPs)-
  • The irony of a MSP policy is that it pertains to a limited number of farmers.
  • As per NSSO 2012-13, less than 10 per cent of the country’s farmers sold their produce at MSPs — the percentage though is a little higher for sugarcane, wheat and rice farmers.
  • If one accounted for the increased procurement of pulses and oilseeds during 2016-17 and 2017-18, this percentage is still not likely to exceed 20 percent.
  • Moreover, MSP operations mostly benefit large farmers who have marketable surplus; these operations exclude much of country’s marginal farmers who produce little surplus.
  • Besides, the large inefficiencies and market distortions caused by a MSP-regime make it an unfavourable choice.
  1. Loan waivers-
  • As per NABARD’s Financial Inclusion Survey (NAFIS), between July 2015-June 2016, 43.5 per cent of all agri-households took loans. Of these, 69.7 per cent took institutional loans — 60.5 per cent took only institutional loans and 9.2 per cent took both institutional and non-institutional loans.
  • This means that about 30.3 per cent (69.7 per cent multiplied with 43.5 per cent) of Indian agri-households took loans from institutions.
  • A loan-waiver is thus likely to benefit only this 30 per cent — even a subset of it, if conditions are imposed on loan waiver schemes.
  • The remaining 70 per cent of Indian farmers, who do not access institutional credit, will not benefit from this scheme.
  • Such high rates of exclusion must be the single-most important failure of our banking system with regard to financial inclusion.
  1. Direct income/investment support-
  • The third option, pioneered by the Telangana government is income/investment support through the Rythu Bandhu Scheme (RBS). Telangana started RBS in May 2018, whereby it gave Rs 4,000 per acre to every farmer.
  • This transfer is made twice a year, coinciding with the two cropping seasons. By directly giving cash, the government aims to support the input purchases of farmers.
  • An RBS-style income transfer is likely to cost about Rs 2 trillion (with some improvisation to include tenants, and restrictions to the actual cropped area).
  • A price-deficiency based payment or actual procurement under MSP operations, if done at a large-scale, is going to cost about Rs 1 to 1.5 trillion (depending on whether market prices are 20 per cent or 30 per cent below MSP).
  • Such operations, of course, are likely to be prone to large-scale corruption.

Policy solutions ahead

  • A government panel aiming to double farmers’ income by 2022 has come up with a 13-volume report, but its final set of policy recommendations is still pending with the Agriculture Ministry.
  • It is expected to focus on ways to ensure sustainability of production, monetisation of farmers’ produce, re-strengthening of extension services and recognising agriculture as an enterprise and enabling it to operate as such by addressing structural weaknesses.
  • This week, the Cabinet approved an agriculture export policy, lifting restrictions on organic and processed food, which it hopes will double farm exports by 2022 and widen the market for domestic produce.
  • Farmers groups are urging political parties to support two private member Bills introduced in the last session of Parliament for guaranteed implementation of MSP and a comprehensive loan waiver and debt reduction scheme.
  • However, they have also come out with a wider charter of demands, which deals with input costs, social security, farm workers employment, land rights, irrigation, agro-ecology, crop insurance and contract farming.

Way Forward

  • The time is ripe for action; one hopes the government acknowledges the reality of farm distress and tries to resolve it on priority.
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