MSP announcements didn’t pander to farmers. But NDA’s welfare promise makes it impossible to ignore them

MSP is the focal point where three irreconcilable strands of political economy show up.

The Minimum Support Price (MSP) of 14 kharif crops announced by the NDA government on Wednesday stuck to the suggestions made by its expert body, Commission for Agricultural Costs & Prices (CACP).

Paddy (common variety) MSP was increased by 5.4% over the previous year to Rs 2300/ quintal. It’s 150% of the average all-India cost for a quintal. Cost here includes actual expenses towards inputs and imputed family labour.

It’s this manner of cost calculation that was the source of friction between the Modi 2.0 government and some sections of farmers. These farmers want the government to use a benchmark which adds rental value of owned land and interest on fixed capital to the way in which costs are calculated to fix MSP. Modi 2.0 found the demand unreasonable and didn’t budge. Neither have farmers backed down.

MSP is the focal point where three irreconcilable strands of political economy show up. They are the primary welfare promise of Modi 3.0, the indispensability of Punjab’s farmers to fulfilling it and the need to transition away from the current pattern of MSP-based procurement if agricultural reforms have to take root.

The Cereal Overhang Of Modi 3.0

BJP’s 2024 election manifesto had one promise that anchored its welfare package. It promised five years of free cereals (rice, wheat and millets) to over 810 million people. Government earlier estimated that fulfilling this promise would cost around Rs 12 lakh crore.

To put this number in perspective, the current cash transfer to farmers (PM-Kisan) will cost only Rs 3 lakh crore over five years, or just 25% of the cereal promise.

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MSP for cereal and their related procurement are indispensable to fulfilling this promise. MSP covers many crops but really works only for paddy and wheat because it’s backed by a ground level system to procure the crops. Over a five-year period, there’s unlikely to be any meaningful change in the current system if Modi 3.0 wants to fulfil its promise.

Why Punjab Is Indispensable

Punjab is the main contributor to India’s food security. As paddy and wheat are the twin pillars of state’s food security mechanism, it’s Punjab’s large procurement that smoothens the fluctuations in the contribution of other states.

It’s paddy where Punjab’s contribution is really critical. At present, about 25% of the paddy procurement comes from Punjab. It’s the largest contributor to the central pool.

One important reason for it is that Punjab grows common variety of paddy mainly to offload into the central pool. The MSP system is what incentivises Punjab’s farmers as paddy consumption within the state is insignificant.

To illustrate, 99% of paddy grown in Punjab in 2022-23 was procured by the government through the MSP route. On the other hand, in Tamil Nadu where rice is the main cereal, only 32% of the production was procured by government using the MSP route. Punjab’s advantage here is that its farmers can offload almost all the paddy they grow. In states which consume rice, a part of the production is held back for domestic use.

And The Cost Of This System

Punjab and Haryana are unsuited to grow paddy on this scale. India’s MSP-anchored food security architecture has resulted in Punjab’s area under paddy increase from less than 5% of gross cropped area in 1960s to over 40% in 2021-22. It has come at the expense of pulses and oilseeds where the area under cultivation has declined from about 23% to 1.5%.

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India imports both pulses and oilseeds, and exports rice.

CACP concluded that the expansion of paddy cultivation in northwest India has not only led to environmental damage, but it’s also led to lower profitability. Hence, the constant tussle between the central government and some farmers over the way in which MSP is calculated.

Both sides find themselves in situation where they need each other but can’t really get along. One likely outcome is that Modi 3.0 will find it hard to make any meaningful progress in agricultural reforms. There may be “big bang” announcements. But the reality is that farmers like other economic agents respond to price incentives.

MSP is an attractive incentive when climatic risks loom large in agriculture. For a ‘rational’ farmer, quite likely an assured price today is more attractive than the promise of a change for the better in the distant future.