India’s MSP conundrum highlights complex interplay between policy, economy, and nutrition

MSP has proven ineffective in driving the change despite efforts to tweak it to increase India’s self-sustenance in oilseeds and pulses.

As India marches towards economic progress, the evolving patterns of rural and urban expenditure reveal profound shifts in consumer behaviour with strong implications for the policy paradigm for the sustenance of the agricultural economy. The heart of this transformation lies in the intertwining dynamics of Minimum Support Prices (MSP) and their unintended consequences on the nation's food security, agricultural sustainability, and economic growth. Let us delve into the relevance of MSP in shaping India's agricultural future amidst changing income levels and dietary habits fuelled by economic growth. India is moving on from food security to nutritional security, which means crop diversification is inevitable. MSP has proven ineffective in driving the change despite efforts to tweak it to increase India’s self-sustenance in oilseeds and pulses. Challenges to food security and nutritional security could largely be solved by way of avoiding food wastage.  As per the latest report of UNEP, India has the second largest food wastage, amounting to 68.7 million tons, i.e., about 50 kgs per capita. Increasing economic growth and, hence, incomes could further bolster food wastage. It means food security is not to support farmers to bolster their productivity but to save what has been produced, and self-sustenance means market-guided production decisions of the farmers.

Rising Incomes and Changing Dietary Preferences

Recent Household Consumption Expenditure Surveys (HCES) highlight a critical trend. As Indian households experienced an average 25 percent rise in income between 2012 and 2020, there's a noticeable pivot in spending patterns, particularly concerning food. This shift is characterised by decreased food expenditure as a share of total spending from 46 percent in 2012 to 38 percent in 2020 and a growing preference for processed and convenience foods with a specific preference for proteinaceous foods and vegetables. While indicative of higher living standards in rural areas, this evolution masks underlying inefficiencies and policy misalignments within the agricultural sector, most notably around MSP.

MSP: A Misaligned Safety Net

The MSP policy, designed as an economic safeguard for farmers by ensuring a minimum price for their produce, paradoxically contributes to a skewed agricultural landscape. While well-intentioned, the MSP system focused on rice and wheat, which have seen a combined area increase of only 4 percent in the last 30 years despite guaranteed prices. In contrast, pulses, a crucial source of protein, have witnessed a stagnant area growth of just 1 percent, highlighting the policy's limitations in promoting crop diversification.

The consequence of such policy misalignment is two-fold. Firstly, it creates a disconnection between crop production and nutritional needs, contributing to a homogenised diet that overlooks the rich mosaic of India's agricultural potential. Secondly, the overproduction of MSP-favoured crops has led to enormous stockpiles exceeding 80 million tons of wheat and rice in 2023, straining storage facilities and exacerbating leakages and inefficiencies in food distribution systems.

The Economic Implications of MSP 

The economic repercussions of MSP-based procurement extend beyond the agricultural fields. As urban and rural incomes rise, the demand for a more diversified and nutritious diet also increases. However, the rigidity of MSP policies restricts the agricultural sector's ability to adapt to these changing demands. This results in a scenario where, despite higher incomes and a growing demand for protein-rich pulses (up by 20 percent in the last decade), the agricultural policy framework stifles innovation and diversification, leading to the overproduction of staples. Furthermore, the disconnect between MSP-driven crop production and market demand leads to increased food imports, particularly pulses and vegetable oils, draining valuable foreign exchange reserves and exposing economic variables such as inflation to global price volatility. This scenario underscores a gross misallocation of resources, where water, land, and labour are directed toward crops that may not best serve the country's long-term nutritional needs or the changing demand patterns arising from economic growth and increasing globalisation.

The Rise of Minor Millets

However, there are signs of change. Recognising the current system's limitations, the government has begun promoting the cultivation of minor millets, which are drought-resistant and require less water but also offer high nutritional value. This shift, coupled with a 41 percent increase in the area under minor millet cultivation in the last ten years, offers a glimpse into the potential of a more market-driven and diversified agricultural future. This policy-driven change will contribute to crop diversification, meet nutritional needs, and make efficient use of available resources.

A Market-Responsive Policy Framework

The evidence calls for re-evaluating agricultural policies, advocating for a transition towards a more market-responsive framework that aligns with India's evolving dietary patterns and economic realities. Such a framework should prioritise crop diversification, encouraging the cultivation of pulses, oilseeds, and other high-value crops based on market demand and nutritional needs. Additionally, it is essential to promote sustainable farming practices like water conservation techniques and organic farming to ensure long-term environmental sustainability. Finally, strengthening market linkages through transparent electronic platforms including eNAM, robust derivative markets, contract farming, farmer collectivisation such as FPOs, and gradually making MSPs an internal number for policy guidance.

Conclusion

The narrative of India's agricultural policy, marked by the well-intentioned but flawed implementation of MSP, offers critical insights into the complex interplay between policy, economy, and nutrition. As India navigates the challenges of the 21st century, revisiting and reforming its agricultural policy framework to better reflect the realities of rising incomes and shifting dietary preferences will be paramount. Only then can the country hope to achieve a sustainable agricultural future that is aligned with its economic growth aspirations and meets the resource availability challenges and nutritional needs, ensuring that the evolving Indian dinner plate reflects a balance of tradition, health, and sustainability.

V Shunmugam is Adjunct Faculty with National Institute of Securities Markets. Views are personal, and do not represent the stand of this publication.