Integrating value addition with MSP to address post-harvest losses

MSP being a floor price set by the government, acts as a sort of safety net for farmers. This tool removes a lot of uncertainty for farmers and helps in food production. The MSP was constituted at such a time when India was facing a food-grain shortage and needed to incentivise its farmers to adopt modern technologies like HYV seeds (high-yielding varieties), fertilizers etc.

Bhuvana, an agricultural economist, says in a conversation with India Business and Trade that the lack of post-harvest processing, and wastage is a serious matter in Indian agriculture. Tackling this problem and the effectiveness of MSP together will be a new and fresh approach to both issues. As is known, having an MSP for a crop is like a safety net for the farmer. Further on, if it gets linked to value addition and post-harvest processing factories or manufacturers, the farmer’s major two risks of price and market will be solved.

IBT: How does the government determine the MSP for different crops, and what factors are considered in this process? 

Bhuvana: The governmental organization, Commission for Agricultural Costs and Prices (CACP) institute, which is an arm of the Ministry of Agriculture and Farmers Welfare declares MSPs for 23 mandated crops and also the Fair and Remunerative Price (FRP) for sugarcane. This is done before the sowing season starts. Kharif and Rabi season MSPs are declared separately. Once the CACP recommends MSP for various crops, the Cabinet Committee on Economic Affairs takes the final decision on fixing the levels of MSP. The 2023-24 marketing season MSP for rabi season was declared in October 2022 and for the kharif season, it was declared in June 2023.

The Minimum Support Price (MSP) determination process involves several critical factors. Firstly, the cost of production is meticulously analyzed, considering A2 (paid-out costs), A2+FL (including family labour costs), and C2 (comprehensive cost, including rent and interest foregone). Secondly, market price trends from previous seasons are examined to ensure farmers receive fair prices, especially during bumper crops or price fluctuations. Thirdly, MSP serves as a tool to balance production in response to demand and supply trends, discouraging surplus production and promoting it during scarcity.

Furthermore, international prices are studied to keep MSP globally competitive for export-oriented crops. Input costs, subject to fluctuations, are carefully considered, along with prevailing market scenarios. The MSP aligns with government policy objectives, including food security and buffer stock maintenance, without causing inflation or burdening consumers. Additional factors, such as yield and weather-related risks, farm size, and support for small and marginal farmers, are also taken into account.

IBT: How has MSP helped in increasing crop production and ensuring food security?  

Bhuvana: MSP being a floor price set by the government, acts as a sort of safety net for farmers. This tool removes a lot of uncertainty for farmers and helps in food production. The MSP was constituted at such a time when India was facing a foodgrain shortage and needed to incentivize its farmers to adopt modern technologies like HYV seeds, fertilizers etc. According to a Situation Assessment Survey (SAS) conducted by NSSO, Ministry of Statistics and Programme Implementation (MoSPI) of Agricultural households during NSS 77th round, pertaining to the agricultural year July 2018 – June 2019, the percentage distribution of households with less than two hectares was 89.4%. With such a large population of small and marginal farmers, price stability becomes a leading feature to grow a crop with MSP, which removes the risk of distress sale. Farmers shift to crops with fixed MSP to get the benefit of fixed pricing. This also leads to better and more efficient usage of inputs. Farmers start to grow those crops with higher MSP and shift from the mono-cropping culture. The government maintains a buffer stock of food grains to help the nation tide over unforeseen circumstances. MSP is a means of fixed income, on which the farmer can depend. The government distributes the procured food grains at subsidized rates to people in poverty thus ensuring food security even to them.

IBT: What are some of the drawbacks/challenges associated with the current MSP system in India?
Bhuvana: MSP has some drawbacks which have to be considered very carefully. MSP is set at the national level, farmers sometimes face disparities in calculations of the cost of production which ultimately affects the MSP. This might hinder the income of many farmers. Only 23 crops are mandated under MSP, which is a very small portion compared to all the types of crops grown in the country. Few crops are being incentivized, and farmers always prefer to grow those crops, neglecting the other crops. This leads to less production of certain crops and overproduction of some others. If a farmer wants his crop to be sold at MSP, he has very less options as to where to sell it. To stay competitive with the MSP, private traders might have to resort to fixed prices which do not match the demand and supply dynamics of that crop. Farmers get exploited by middlemen during procurement leading to extra burden on them. Small and marginal farmers are unaware of such centres or pricing tools which can help them gain a better income.

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

Bhuvana: The Indian government introduced the MSP policy in 1965 to modernize agriculture and alleviate shortages. However, with nearly 90% of farmers owning less than two hectares of land, accessibility to MSP is crucial due to their low yields, which weaken their bargaining power in private markets. To improve procurement, schemes like the Market Assurance Scheme (MAS) have been initiated, allowing direct crop purchases at MSP centers. Addressing the information gap, independent information centers, possibly integrated with existing facilities like dairy collection points, could assist farmers. Diversifying MSP to include crops like horticulture can boost income, especially for small and marginal farmers. Establishing multiple procurement centers closer to them can ease access. Curbing middlemen exploiting farmer ignorance and corruption is vital. Regularly adjusting MSP to align with farmer needs is essential. These gradual changes can strengthen the policy and benefit Indian agriculture.

IBT: Experts’ 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.

Bhuvana: The lack of post-harvest processing, and wastage is a serious matter in Indian agriculture. Tackling this problem and the effectiveness of MSP together will be a new and fresh approach to both issues. As is known, having an MSP for a crop is like a safety net for the farmer. Further on, if it gets linked to value addition and post-harvest processing factories or manufacturers, the farmer’s major two risks of price and market will be solved. They can have many positives such as,

• Job creation: Employment opportunities for value addition will increase, creating a demand for skill sets in people such as machine handling, recipe creation etc.
• Diverse income sources: the farmer can now choose to sell his yield to different buyers at different prices, increasing his income.
• Decrease in wastage: This is especially true for horticulture crops which have very little shelf life and have to be stored very carefully. The fruits, vegetables or flowers have to be sold off within less time, or else will just lead to spoilage and loss for the farmer. This can be reduced if various value addition organizations are set up and are able to buy from the farmers.
• Food security: With an increase in value-added products, the availability of products will increase, decreasing the price which will make it available to a larger section of the population.
• Diversification: With multiple products available in the market, consumers will benefit.
• Increase in demand: Once a product becomes popular and comes into demand, the farmers growing it will have better prices and more market access.

MSP benefits, including value addition, can be more accessible to farmers and consumers. MSP encourages crop production, increasing raw material availability and expanding value-addition organizations. Conversely, when there’s a higher demand for value addition, MSP can promote it.

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?

Bhuvana: In my opinion, establishing a prosperous value-addition industry, with the potential to double farmers’ income, requires a concerted effort involving government, industries, and farmers. Critical areas for attention include creating an investment-friendly environment to support industrialists and entrepreneurs, ensuring accessible credit for both stakeholders to facilitate seamless linkages, promoting research and development for increased competitiveness and improved crop quality, enhancing skills among farmers and industrialists, leveraging Farmer Producer Organizations (FPOs) as primary market sources, offering subsidies and incentives, particularly through efficient utilization of MSP, to expand the industry, encouraging agri-entrepreneurship with innovations in technology and supply chains, and conducting awareness campaigns and knowledge-sharing activities to integrate farmers into these industries. 

I think horticultural crops are the best choice for value addition. Their taste and texture make them versatile for creating various products, unlike field crops, pulses, and oil seeds. Horticultural products like jams, squashes, and juices are easy to store and have a longer shelf life. They offer flexibility in producing foods with different textures and structures. Additionally, the income potential from horticultural products is higher, and they have strong export potential, including items like tea powder, cut flowers, spices, and medicinal plants. Thus, horticultural crops are my preferred option for value addition.

Bhuvana is an Agricultural Economist. She has a keen interest in the fields of microeconomics, public economics and data analysis of all types of economics. Her long-term dream is to help create an economy, even just by a little, where farmers are given what they deserve.