MSP or value addition? The future roadmap of Indian agriculture
The Minimum Support Price (MSP) system is a government policy tool in the agricultural industry created to shield farmers from changes in market prices and guarantee a minimum income for their produce. The Commission for Agricultural Costs and Prices (CACP) recommends MSPs for 23 commodities, which comprise 7 cereals, 5 pulses, 7 oilseeds, and 4 commercial crops. The MSP is the minimum guaranteed price at which the government agrees to buy certain agricultural commodities from farmers.
The MSP regime has some drawbacks, such as centralised procurement, limited coverage, natural disasters and market risks, insufficient market regulation, middlemen, and few states receiving benefits. TPCI’s research team analyses whether value addition can provide a more sustainable roadmap in its stead.
Image source: Pexels
The Minimum Support Price (MSP) is a government intervention in the agricultural sector designed to protect farmers from market price fluctuations and ensure a minimum income for their produce. It is simply the minimum guaranteed price at which the government agrees to buy certain agricultural commodities from farmers.
The government announces the MSP for various crops such as wheat, sugarcane, cotton, and oilseeds prior to the sowing season. The MSP is calculated using factors such as production costs, market trends, and demand-supply dynamics. It is usually set higher than the production cost in order to give farmers a reasonable profit margin.
The Cabinet Committee on Economic Affairs (CCEA) approved an increase in the MSP for all Rabi crops for the Rabi Marketing Season (RMS) 2022-23, with the goal of realigning MSPs in favour of oilseeds, pulses, and coarse cereals.
In India, the majority of farmers (Small and marginal farmers) with less than two hectares of land account for 86% of the total cultivators in India. Small farmers typically own or cultivate small plots of land and engage in subsistence farming or small-scale commercial agriculture.
MSP’s role in the agriculture sector
The experience of the last 50 years clearly highlights the fact that Indian farmers strongly respond to market signals. These signals could come from public policy (like MSP, and procurement) or emanate from demand-side changes. Demand-driven factors are also found to have a much stronger effect on the growth of output, as compared to the effect of price support.
The MSP plays a crucial role in the agricultural sector for multiple reasons. Firstly, it offers income security to farmers by guaranteeing a minimum price for their produce, shielding them from financial hardships caused by market fluctuations. This stability encourages farmers to continue their agricultural activities confidently. Secondly, the MSP acts as a powerful incentive for farmers to increase production.
The system of MSP for farm produce is essential to guard against poor competitiveness and malpractice in agri markets. MSP also becomes important during periods of glut, even if markets are competitive. However, the system of MSP should not cause distortions in market signals and incentives.
Products of MSP
The minimum support price system, which began with wheat in 1965, now includes 24 crops (except sugarcane). The Union Government announced a statutory minimum price for sugarcane, known as the fair and remunerative price (FRP).
As of now, The Commission for Agricultural Costs and Prices (CACP) recommends MSPs for 23 commodities, which comprise 7 cereals (paddy, wheat, maize, sorghum, pearl millet, barley, and ragi), 5 pulses (gramme, tur, moong, urad, and lentil), 7 oilseeds (groundnut, rapeseed-mustard, soyabean, seasmum, sunflower, safflower, and nigerseed), and 4 commercial crops (copra, sugarcane, cotton, and raw jute).
Every year, the CACP submits its recommendations to the government in the form of Price Policy Reports, separately for the five commodity categories of Kharif crops, Rabi crops, Sugarcane, Raw jute, and Copra.
Earlier, MSP was effectively restricted to only rice and wheat in the states, which were early adopters of Green Revolution technology. However, MSP operations in wheat, rice, and cotton have now been expanded to many other parts of the country.
The Union Government mandated the necessity of maintaining a margin of at least 50% over A2 costs (all paid-out costs) plus the imputed value of family labour in 2018, ushering in a significant shift in the MSP structure. This resulted in MSP being higher than open market prices in many cases.
Agricultural commodities can be divided into five groups in terms of price support, subsidies, and other government support measures.
|Classification of agricultural commodities|
|Commodity||Support on output side||Input subsidy||Total direct support||Growth rate from 2011-12 to 2020-21|
|Rice, wheat, cotton and sugarcane||Very strong MSP and procurement||Very high||Very high||1.39%|
|Coarse cereals, pulses, oilseeds||MSP for some produce||Small||Small||2.44%|
|Fruits and vegetables||Nil||High||Small||3.47%|
|Dairy and other livestock products||Institutional support through cooperative marketing of milk||Nil||Little||5.84%|
Source: Niti Aayog
The first group comprises rice, wheat, sugarcane, and cotton. These crops, which derive maximum benefit from the MSP regime as well as input subsidies and output price support among all agri commodities, show an annual growth rate of 1.39% in this decade because of the higher use of fertilisers and a higher proportion of area under irrigation, both of which are highly subsidised.
The second category comprises coarse cereals, oilseeds, and pulses. Though they are covered by MSP, only a small quantity of the produce is procured under this regime. The subsidy benefit for these crops is insignificant as they are mostly rain-fed and use lower amounts of fertiliser. These crops showed much higher growth (3.47%) than the much-vaunted crops like wheat and rice.
Horticultural crops (fruits and vegetables) belong to the third group, which is not covered by MSP or any other price assurance scheme and hardly benefits from price intervention measures by the government. However, they benefit from subsidies on irrigation, power, and fertilisers. On the other hand, horticultural crops, for which there is no price intervention by the government, experienced annual growth of 3.47%.
The fourth group comprises the livestock sector, for which there is neither price intervention by the government nor any input subsidy provided. The output of the livestock sector increased at a rate of 5.84% per annum, which is four times the growth in crops highly supported by the government. The dairy segment of the livestock sector benefits in terms of institutional support through co-operatives which procure milk from producers at assured prices linked to the percentage of fat.
The fifth group comprises fisheries (inland and marine), which also get no price support and hardly any subsidy on inputs. The highest growth rate (8.97%) is achieved in the fishery sector, which is largely free from government intervention in the form of input subsidies and output prices.
Drawbacks of MSP
The MSP acts as a powerful incentive for farmers to increase production. However, the MSP regime has some drawbacks.
- Centralised procurement: Centralised procurement and storage are the biggest challenges of the MSP regime. This not only adds to overhead costs but also leads to a high percentage of wastage as grains rot in warehouses due to inadequate storage facilities.
- Limited coverage: The majority of farmers lack crucial support under the current MSP system. According to National Sample Survey Office data, only 6% of farmers in the country are able to sell their crops at MSP due to factors such as farmer ignorance, corruption at government procurement centres, and delayed payments.
- Natural disasters and market risks: Farmers’ income is uncertain and unreliable because they are still susceptible to market forces and natural disasters. Farming has become more complicated due to climate change. Tropical climate and humidity also play havoc, which makes it difficult to store food grains for longer periods.
- Insufficient market regulation: The price at which farmers sell their produce and the price at which consumers purchase the same produce differ significantly as a result of middlemen taking advantage of farmers. This absence of market regulation has a negative effect on farmers’ income.
- Middlemen: Many illiterate farmers are taken advantage of by middlemen because they are unaware of the Minimum Support Price. Not all farmers have equal access to the benefits given by the government through MSP. Several regions in the country do not have effective implementation of the scheme.
Dr S.Gandhiya Vendhan, Assistant Professor at Tamil Nadu Agricultural University said, that MSP is helping farmers by giving them guarantees for their crops and it is also helping in increasing crop production. But only a few states receive its benefits such as Punjab and Haryana. This is the main issue of MSP and its limited coverage across India.
Role of value addition
According to Prof Nilabja Ghosh, Institute of Economic Growth, Delhi University, “India produces large amounts of agricultural products, some of which is 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 through value addition have a huge potential for contributing to India’s rural and agricultural development by investing and innovating on 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.”
She further elaborated, “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.”
This process of value addition in food processing can help farmers by increasing the shelf life of their produce and reducing waste. Value-added processing is a means to utilise produce not used for fresh market sales and the surplus of product during the growing season. It can also help them get better prices for their produce.
The other challenges in the agriculture industry such as poor outreach of government initiatives to small farmers, especially women and farmers’s limited resources and incomes. Value addition is considered to be a useful strategy to support small and marginal farmers.
According to Dr. Ganesh Rede, an agricultural economist, the concept of value addition has immense potential for supporting Indian farmers and their crops. However, he underscores the necessity for substantial investments and a concerted emphasis on effective marketing strategies to harness its full benefits.
He also added that increasing the price of MSP will not solve all the problems of farmers. The government needs to work on its application in every region of India not only a few states. The Indian government also need to invest in infrastructure facility for farmers to sell their produce in the market directly as it will remove the intermediary channels through which farmers will get a higher profit margin directly to them.
A coordinated effort between the government, industries and farmers is required to establish a smooth-running value-addition industry which will help double farmer’s income. That being said there are some issues like investments, credit accessibility, R&D, skill development, and awareness campaigns which the government and industries can tackle to make it into a reality, said Bhuvana C R- an agricultural economist.
Value realisation of India’s exports (raw vs processed)
|Product group||HS Code||Product description||Average value realised (US$/kg)|
|Potatoes||07019000||Potatoes Fresh Or Chilled Other Than Seeds||0.2|
|20041000||Potatoes Prpd/Prsvd, Frzn||1.2|
|19059090||Othr Bread, Pstry, Rice Papr & Smlr Products||2.24|
|19054000||Rusks, Toasted Bread & Similar Toasted Products||2.2|
|03063300||Live Fresh Or Chilled Crabs||9|
|16051000||Crab Prepared Or Preserved||15.03|
|Tea||9024020||Tea Black, Leaf In Bulk||2.86|
|9023020||Black Tea In Packt >25 Gm But <= 1 Kg||4.86|
|Mango||08045030||Mangoes Sliced Dried||0.8|
|20079910||Jams Jellies Mrmlds Etc. Of Mangoes||1.54|
|20089999||Other Fruits Squash Prpd/Prsvd||1.76|
|Cucumbers & Gherkins||07070000||Cucumbers And Gherkins Frsh Or Chld||0.57|
|20011000||Cucmbrs And Ghrkns Prpd/Prsvd By Acetic Acid||1.1|
Source: DGCIS; based on data for 2022-23
The agricultural sector in India is a major contributor to the economy. This has created opportunities to differentiate products and add value to raw agricultural commodities. This shift has significantly affected the price difference between farm-level and retail prices.
Value addition in agriculture is the process by which a high price is realised for the same volume of a primary product of agriculture through processing, packing, improving the quality, or other similar methods. For instance, producing flour and bread from wheat increases farmers’ profitability.
The above table shows how value addition and processing improves average realisation of agri products. There is a strong case for focussing on value addition, as highlighted by a FICCI BCG report for the following reasons:
- India has a competitive advantage in terms of agri resource endowment, large domestic market and scope for promoting value added products.
- The food processing industry has a substantial positive socio-economic impact. On average, the industry generates employment for ~8 people per Rs 1 crore of investment as fixed cost which is higher than the industry average of ~5.
- The gross value added per employee in the food processing industry is ~4 to 4.5 times higher compared to the agriculture industry, thereby providing an opportunity to enhance farmers’ incomes.
- Better value realization in exports improves trade balance and processed food product exports are relatively less immune to commodity demand/supply fluctuations.
- With growing awareness, health consciousness and improving lifestyles, there is a shift in demand towards processed and packaged foods.
The sector has huge investment potential. The food processing industry has made an investment of ₹7,427 crore under the production-linked incentive (PLI) scheme as of July 2023. Currently, India’s overall stature in processed food exports leaves much room for improvement. When we consider prepared foodstuffs, (HS 16-22), India is ranked 16th with exports of around US$ 10 billion in 2022. However, India’s 5-year export CAGR in these products is much higher at 21% (compared to global import CAGR of 5.4%), according to a CATR analysis, although a major driver of this rise has been processed products of sugar.
Clearly, the direction is positive and this sector needs further policy impetus. Further acceleration of this growth is expected to play a pivotal role in improving India’s agri export revenues, minimising the impact of agri commodity price fluctuations and improving farmer incomes, thereby reducing the need for MSP.