Interview: Legalising MSP can be anti-farmer; remove export bans, stocking limits, says Ashok Gulati

Ashok Gulati is a Professor at the Indian Council for Research on International Economic Relations (ICRIER)

At a time when farmers in India are demanding higher minimum support price (MSP) for their crops as their income stagnates, veteran economist Ashok Gulati believes that legalising Minimum Support Price (MSP) may be “anti-farmer.”

Gulati, a Professor at the Indian Council for Research on International Economic Relations (ICRIER), instead suggests creating a price-stabilisation fund to ensure that the government may step in to procure crops when prices fall below MSP, as well as raising the annual support under the Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) to Rs 10,000.

Under the PM-Kisan scheme, the centre provides Rs 6,000 to eligible farmers per year. Dashing widespread expectations of an increase in outlay, the union budget for 2024-25 kept the allocation of the scheme unchanged at Rs 60,000 crore for the next fiscal.

Gulati also said that to protect farm income, the government needs to remove bans and stockpiling limits on commodities such as wheat and rice.

“Since it is an election year, the government has started imposing export restrictions and stocking limits, among others. Because of this, market prices have come down to MSP levels, and farmers are getting lower than what the market could have given them. So, we need to remove these restrictions on commodities. I think export duties should not be levied for 90 percent of commodities so that farmers can get competitive prices for their products,” he told Moneycontrol in an interview.

Edited excerpts:

Why do you believe that MSP is fiscally problematic?

I would argue that legalising MSP may be anti-farmer. Normally, prices are decided by demand and supply, so if MSP is made legal, then, say, if the production of a commodity is at 100 units and demand is 70 — then no one will touch the remaining 30, which will be a loss for the farmer. If MSP is legal then anyone buying below MSP could go behind bars. Demanding legal MSP across the country for 23 commodities and implementing it is almost impossible, according to me.

Then how can we protect farmers from the impact of unpredictable market prices and erratic rainfall?

The 23 commodities, which are currently under the existing MSP system (without legal guarantees) constitute only 28 percent of agricultural produce. The segments of agriculture that are growing at a faster rate are poultry, fisheries, and milk, which do not have MSP. Almost 72 percent of agriculture is driven by market prices, not MSP. Within the 23 commodities, MSP has been implemented primarily for rice and wheat, and that too in 5-6 states. For the last 50 years, prices of paddy in Bihar are 15-20 percent lower than MSP, so why cannot procurement be done there?

The real issue is that farm income has not been increasing sufficiently. That is a legitimate concern. This is why farmers are demanding higher prices for their crops, which would be 25-30 percent higher than the current MSP, and that the government should guarantee that no one is allowed to purchase below that. However, that is not a rational option.

MSP is not the right instrument to increase farm income since it is not implementable and will create major disruptions in the economy. And, depending on the current prices, the costs for the government could go up substantially. We need to find better solutions than this.
What are the alternatives?

First, increase investment in agriculture R&D, irrigation, and innovation, and second, give them access to the best markets — domestic as well as international. Farmers should have the freedom to sell anywhere to get the right price. The government is walking a tightrope – balancing the interests of consumers and farmers. While consumers want lower prices, farmers want the best price for their products.

Since it is an election year, the government started imposing export restrictions and stocking limits, among others. Because of this, market prices have come down to MSP levels, and farmers are getting lower than what the market could have given them. So, we need to remove these restrictions on commodities. I think export duties should not be levied for 90 percent of commodities so that farmers can get competitive prices for their products. There is a consumer bias, and that needs to be sorted out. Around 80 percent of our agricultural commodities are exportable. The two ways we can support farm income is by investing more to increase productivity, and remove restrictions on exports and domestic markets so that farmers can get the best price.

Could the now-withdrawn farm laws have helped?

One of the ways to do price discovery and minimise price risk is contract farming. The fastest growing sector in agriculture is poultry, 8-9 percent per annum, and 80 percent of it is done through contract farming — there is no MSP there. If the farm laws had been passed, farmers of other products could have benefitted from contract farming.

How can the government balance fiscal priorities and the interests of farmers?

We have to compassionately sit down with farmers and pitch to them the option of rationalising subsidies. As an economist, I can see up to Rs 1 lakh crore in savings by rationalising various subsidies on food, fertilisers, MGNREGA, crop insurance, agri-credit, etc. These savings can be used to give a new package to the farmers.

What other reforms can be introduced to protect farmers?
I would also suggest enhancing the price stabilisation fund, wherein, if prices fall below the MSP, the government intervenes by procuring a portion of the produce to ensure farmers receive a fair price, and protects them against market risks. This would offer better support to farmers than legalising MSP. Another way could be to increase the income support under the PM Kisan scheme to, say, Rs 10,000 per year, up from Rs 6,000.