MSP covers just 6% of agri economy but eats up Rs 13.5 trillion, stifling rest of farm sector: SBI report

MUMBAI: At a time when the government is moving towards the idea of regular increase in the minimum support price (MSP) amidst farmers’ clamour to provide legal backing for the pricing mechanism, the SBI research team has said this is more of a political obsession, stifling the shift to smart agriculture practices. It holds back the redressal of pressing issues in agri value chain financing and livelihood support, because the MSP regime covers just about 6 percent of the farm universe, says the SBI report.

If the government procures all the MSP crops, the fiscal burden will be a whopping Rs 13.5 trillion of FY24 GDP, argues Soumyakanti Ghosh, the chief economic advisor at SBI in the pre-budget report. He has instead called for crop diversification and better farming practices along with better farm value chain financing.

Food grain output (a key MSP item) is only 17 percent of overall output of the agri sector, while as much as 71 percent of agriculture output is generated through vegetables, fruits, fisheries, forestry and livestock. But the politics of MSP fails to address the concerns of the rest of the sector in a more holistic manner, says the report.

Agriculture and allied sectors were estimated at Rs 56.19 trillion in FY23. But the share of food grain in the agri & allied output is only 17 percent, while livestock is 30.7 percent and vegetables & fruits are 11.4 percent. But food grain output of Rs 3.4 trillion, which the government procures under MSP, is at 6 percent of the total agri & allied output in FY23.

Stated differently, since the MSP addresses only 17 percent of the agriculture output, the remaining 83 percent needs to be supported through continued agricultural sector reforms but MSP as a political weapon obfuscates the issues facing the agri sector, says the report.

During the past 10 years, MSP of all the 22 crops has been increased on an average more than 100 percent but the government procures mostly wheat and paddy through FCI and state agencies. Additionally, oilseeds, pulses and copra are procured from registered farmers under price support scheme under umbrella scheme, as per its guidelines at MSP in consultation with the respective states, when market price of these produce falls below the MSP. Cotton and jute are also procured by the government at MSP through the Cotton Corporation and Jute Corporation, respectively.

Currently market prices are higher than MSP when it comes to maize, arhar, urad, paddy, sesamum, wheat, gram, masur etc, while for crops like jowar, bajra, ragi, moong, soyabean and cotton, they are lower than MSP.

The government has declared MSP for 22 crops but procures only six or seven crops like wheat, rice, pulses etc contributing only 6 percent of the total agri & allied sector output. In other words, 94 percent of the total output remains outside the MSP support.

Livestock output has increased to Rs 17.25 trillion in FY23 from Rs 4.87 trillion in FY12. The share of livestock in total agri & allied output has increased to 30.7 percent in FY23 from 25.1 percent in FY12. In case of fruits, vegetables and spices, the output has increased to Rs 14.43 trillion in FY23 from Rs 5.14 trillion crore in FY12.

Ghosh says the “MSP demand is a 6 percent trap and an obsession,” adding that it clouds the shift towards a 360 degree approach to agri value chain financing and crop diversification. Because MSP, being an output price, is common across the country, there is sufficient rationale to move towards one nation/one scale of finance for all the 23 commodities covered by the MSP system. This will be a major reform in agri value chain financing particularly for crop cultivation and there is also a need to have a direct consumer farmer interface through development of more mandis across the states, he says.

In states where land records are digitised and banks are given a provision to record their loan interest on the digitised land portal, the regulator may mandate banks to lend up to Rs 3 lakh without collateral for any activity including crop loans, within the agri value chain. At present, the mandated amount for collateral-free loan is Rs 1.6 lakh.

For the short-term, Ghosh suggests that instead of according legal backing to MSP, private parties can be mandated to buy crops at MSP or above MSP. If the government procures the entire amount, then storage will be an issue. Another measure is to directly compensate the farmers the difference between selling price and MSP. This way, the fiscal cost of the government will be contained.

For the long-term, he wants the farmers to be encouraged to go for crop diversification by promoting high-value and climate-resilient crops to increase their income opportunities. Another step is to strengthen agricultural marketing infrastructure and increase public investment in agri infrastructure.