Food processing can drive rural and agricultural development in India

The food processing industry has substantial potential to contribute to India’s rural and agricultural development through investment, innovation, supply chain modernization, and global market expansion. This development can integrate farmers into a growing economy, create employment opportunities, ensure food safety, and meet consumer demands effectively.

Nilabja Ghosh Professor at Institute of Economic Growth in a discussion with India Business and Trade talked about India’s MSP system and its impact on agriculture. MSP, determined by factors like cultivation costs and market trends, aims to support farmers by ensuring minimum returns. However, challenges in estimating demand and the system’s effectiveness vary across crops. Value addition through processing is suggested to enhance farmer income and reduce losses, particularly for perishable products.

The food processing industry plays a crucial role in this transformation. To benefit small farmers effectively, a multi-pronged approach combining MSP, value addition, and industry integration is essential for India’s agricultural development.

Image source: Nilabja Ghosh

IBT: How does the government determine the MSP for different crops, and what factors are considered in this process? How does MSP impact the decisions of farmers regarding crop selection and planting?

Nilabja Ghosh: MSP is fixed by CACP under the Department of Economics and Statistics, MoA&FW. Their crucial decision relies heavily on information provided by an official survey of a sample of farmers on the Cost of Cultivation. The CACP states that the determination of MSP takes into account not only the cost of cultivation but also other factors that are becoming important as the economy opens up. Originally, the administered price was meant for procurement and distribution of grains to citizens in a food shortage country but subsequently, MSP became dominantly a support price for the farmers, at which the farmers have the option to sell to public agencies. This remains the prime role of MSP to date. With economic reforms and trade liberalizations, MSP fixation began to take account of ‘price trends’ in the domestic and international markets, ‘intercrop price parity’ and ‘terms of trade between agriculture and non-agriculture but its key function remained to assure minimum returns to farming which is 50% as of now considering the cost of cultivation obtained from the survey.

Although ‘demand and supply’ and ‘likely implications of MSP on consumers’ are also stated factors determining MSP, it is not clear by what means and how accurately the Ministry projects the demand and the implications stated. Working this out is far from easy, NSO Household Consumer Expenditure Survey and modelling exercises at NITI Aayog being the recourses. Also, it is not clear how far such estimates successfully capture the demand coming from the processing industries and from overseas markets. The lacunae on the demand part could weaken MSP from satisfying market demand for the best interest of the farmers in respect of various crops. MSP can take part of the blame for occasional gluts and wastages of grains in public stock. Fixation of MSPs, so long as the policy remains active, is a challenging and important task. Further, the strength of MSP’s impact depends on the procurement drive of government machinery.

India is a diverse country with varied cropping patterns that need to suit the diverse agro-climatic conditions. In any particular region, the option of growing a number of crops exists. The decision of a farmer to choose a crop for cultivation depends on natural factors like climate and soil, water availability from irrigation, access to credit and inputs and the economic incentives coming from the market. With limited land, a farmer may compare the profit potential from each crop against another among the feasible crops but the economic returns also depend on the prices of inputs like fertilizer. Farmers in India are known to respond to economic incentives. To the extent that the crop chosen is under procurement operation of the government or farmers can use the knowledge in bargaining with traders, of which there is little evidence, MSP is likely to influence price. Rice and wheat, the two staple food grains, still remain the main items of procurement.

IBT: How has MSP helped in increasing crop production and ensuring food security? Can you please provide examples of success stories where MSP has positively impacted farmers’ livelihoods?

Nilabja Ghosh: The MSP’s primary goal is to enhance farming profitability and ensure farmer welfare. While it has benefited over two crore farmers, about 14% of land-owning farmers, the exact impact is challenging to assess due to the inclusion of private procurement. During times of bumper production, the MSP prevents market price drops, safeguarding farmer income. In the era of the Green Revolution, MSPs incentivized adequate production to eliminate shortages. Today, MSPs aim to boost crops in short supply, such as pulses, crucial for Indian nutrition. However, MSP effectiveness depends on input cost control and factors like soil, water, and weather. Despite MSP hikes, arhar (pulse) production stagnated, raising questions about its impact on crop production and food security.  MSP works as an incentive only if procurement takes place or at least is an option.

IBT: What are some of the drawbacks/challenges associated with the current MSP system in India?

Nilabja Ghosh: The major drawback of India’s MSP system is its unequal distribution of benefits, favouring rice and wheat growers in the northwestern region. While states like Punjab, Haryana, Chhattisgarh, and Madhya Pradesh initially benefited, decentralized procurement expanded to include other states like Andhra Pradesh. However, this supply-driven approach compromises the interests of consumers and subsistence producers. Ecologically, it results in excessive water use, drainage problems, and soil degradation. Assessing benefits for small farmers and non-rice/wheat crop growers remains challenging, despite government claims. Transparency and measurement in the current system need improvement.

IBT: What strategies can the government employ to ensure that the benefits of MSP reach small and marginal farmers effectively?

Nilabja Ghosh: To reach out with benefits to the small and marginal farmers who make up over 80% of Indian farmers, MSP has strong limitations as the returns come from sales. Larger farmers operating mostly in endowed areas with resources to invest and adequate land generate most of the surplus that is sold in the market. Although various schemes of rolling out MSP without direct government purchase have been tried, it is difficult to reach subsistence farmers who can be perceived to sell grains to themselves for consumption. A direct benefit can be a better option.

IBT: Some expert opinions suggest that adding value to agricultural products may be a better approach to making MSP more effective in addressing the issue of post-harvest losses and a lack of value addition in agriculture. 

Nilabja Ghosh: Adding value to raw farm products by packing, cleaning and processing can help enhance farmer’s income while reducing post-harvest losses if agriculture is integrated with the food industry through contracts, buybacks and outsourcing of services. Food processing with farmers’ participation would be a very important way forward in developing agriculture regardless of MSP. Sales of food products require technology, often purchased by import, knowledge of food safety and hygiene protocols disseminated across the supply chain, attention to nutritional issues, advertisements with competition and therefore calls for investment in the sector. With this approach, demand for farm output will increase especially from firms with purchasing power leading to higher returns which could make MSP redundant or a fallback option. A precondition for all this to happen would be adequate production especially to meet the food security obligations to the poor.

IBT: How can the Indian government and Industries facilitate value addition in agri-products to boost farmers’ income? Which crops are best for value addition, in your opinion?

Nilabja Ghosh: While most crops including cereals can be amenable to value addition, especially for packaging and cleaning, processing of perishable products like fruits and vegetables will have a double benefit of eliminating wastage of output and the resources and inputs that went behind its production that often translated to farmer’s losses or exorbitant prices that might confront the consumers. Crops like pulses and millets are only moderately stable in normal conditions and they can be processed in a reasonable time horizon to prevent their decay. Processing with appropriate technology may add taste and flavour to nourishing crops like fruits and millet that the government wants to promote to create demand.

IBT: How can the food processing industry help increase the value of agricultural produce and help farmers earn more?

Nilabja Ghosh: India produces large amounts of agricultural products, some of which are wasted and some sold under distress. Processing of these products is rather minimal. Less than an estimated 10% of the total products and 2% of fruits and vegetables may be undergoing processing. The food processing industries have a huge potential for contributing to India’s rural and agricultural development by investing and innovating in production, locating units appropriately, tying up with the farmers, modernizing the supply chain in which they operate and reaching out to larger and global markets. Success in this field will help to integrate farmers with the larger growing economy and reap its benefits as also generating employment across the supply chain. Compliance with food safety, nutrition conservation, compliance with contracts and responding to consumer needs require particular attention.

Prof. Nilabja Ghosh is a Professor at the Institute of Economic Growth. She has earlier served as a Lecturer (project) Indian Statistical Institute in Calcutta, a Lecturer in Economics (permanent), at Calcutta University, a Consultant at NCAER and NIPFP in Delhi, and an Associate Professor (Leave vacancy) at the IES unit, IEG.

Her research interests include Agriculture, Resources and Development, Supply responses, Fertilizer use and organic farming, Education, Gender, Globalization, Food marketing and processing, Econometric modelling, Forecasting of output, and Measurement of inputs and output in agriculture.