January , 2019
Government must subsidise agriculture but in what way?
14:06 pm

Kishore Kumar Biswas

Minimum Support Price

In India, the Commission for Agricultural Costs and Prices has recommended Minimum Support Prices (MSP) for 23 agricultural commodities. On the basis of that recommendation, the central government announces MSPs at the beginning of the sowing seasons.

The MSP is a form of market intervention by the government which guarantees the highest prices at which the government is ready to buy the entire farm production of certain crops (23 at present) direct from the farmers. The most important purpose of this policy is to protect the agricultural sector from sudden fall of prices of agro-products during over production periods. But if the market prices are higher than MSPs, the farmers can sell their products in the market. It is expected that introduction of proper MSP rates will substantially minimise agrarian distress.

The Commission considers a variety of factors to decide the MSPs. These factors vary among the regions. The cost of cultivation per hectare, prices of inputs and their changes, expected prices of the products in the internal markets, area of cultivation, amounts of import and export, level of stocks, total and per capita consumption, international prices and its changes, derivative prices of some of the goods like sugar, cotton, edible oil and jute and cost of marketing are the important factors that determine MSPs.

Why is MSP not a better way?

In the recently concluded state elections in five states, the rediscovery of the Congress can be an eye opener. Prolonged rural distress has been a matter of discussion throughout the country. Though the Modi government has tried to ease rural distress, their policies have found limited impact resonance. Farm agitations have gripped a large number of Indian states. 

The central consideration of this discourse is how the agrarian sector has been financially helped by the government. The government has increased MSP. Agricultural loan waivers in many states have been a matter of controversy. The Congress is in favour of 50% over and above comprehensive cost as MSP. The Modi government promised 50% over and above paid-out cost plus family labour cost as MSP. Naturally, the Congress promised a much higher amount. Additionally, there is also direct income support policy (DIS). As of now, the DIS has been considered the most effective policy which is being followed by the Telengana government.

MSP is related to a limited number of farmers

The main weakness of MSP is that it is applicable to a very limited number of farmers. NSSO data indicate that less than 10% of the farmers in 2012-13 were able to sell at MSPs. Recently, pulses and oil seeds are being largely procured. It is also being reported that the figure is close to 20% in 2016-17 and 2017-18 fiscals. Additionally, the biggest beneficiary of the MSP system is the big farmers as they have large amounts of surplus produce.

Waiving of loan is also limited in impact

Ashok Gulati and Sweta Saini have stated that in July 2015 and June 2016, 43.5% of all agricultural households took loans. The have arrived at this conclusion by analysing the data of NABARD’s Financial Inclusion Survey. Out of the agricultural households that took loans, 69.7% (60.5% took only institutional loans and 9.2% took institutional and non-institutional loans) took institutional loans. This means that 30.3% (69.7 % of 43.5%) of the agricultural households only took loans from institutions. So loan waivers can effectively give relief to only 30% of borrowing agricultural households.


There is no doubt that neither waiving of agricultural loan or the MSP system or the DBS (Direct Benefit System) can be a permanent solution. Agriculture must be a subsidy sector in a developed country or otherwise. Eminent economist Professor Ratan Khasnobis informed BE that if there is no subsidy in agriculture then it cannot be a viable sector. In that case, the prices of agricultural products will increase which would increase the prices of wage goods and that in turn would lower the profitability of the industry and service sectors. The tax revenue of the government would be lowered resultantly. According to Khasnobis, the government should subsidise agriculture to ensure economic mobility and growth.


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