The Curious Case of MSP

Agriculture

2025-08-20

Minimum Support Price, procurement

By Ankit Priya, Research and Advocacy Lead at the Foundation for Democratic Reforms

A commodity is produced and sold in the market when the buyer has both a need for it and the willingness to pay. But what happens when production of a commodity rises while its consumption slows because consumer preferences have shifted? In such a case, the producer would normally stop producing that commodity and switch to one that is in demand. However, if the purchase of that commodity is guaranteed regardless of consumption, the producer has no incentive to make the shift. Sounds absurd, right? In a modern economy, why would a commodity be produced without market demand, and why would any entity guarantee its purchase when there are fewer consumers for it? This is precisely the curious case of Minimum Support Price (MSP) and agriculture in India.

Minimum Support Price (MSP) is the assured price at which union and state government agencies procure foodgrains from farmers for the Central Pool. This pool is used to supply subsidised foodgrains under the Public Distribution System (PDS) that provides food security coverage to nearly 80 crore beneficiaries¹ and other welfare schemes, and to maintain buffer stocks for the nation’s food security. The union government announces MSP for 22 crops² each year before the Kharif and Rabi sowing seasons, based on recommendations from the Commission for Agricultural Costs and Prices (CACP). However, in practice, public procurement is heavily concentrated in a few crops, mainly paddy (rice) and wheat, and to a limited extent pulses, since they form the bulk of distributed grain and buffer stock holdings.

Conceived as a safeguard for farmers in a market characterised by significant information asymmetry on production, consumption, and price trends, MSP played a critical role in the early decades after its implementation, reducing import dependency and achieving self-sufficiency in foodgrain production.

Does MSP benefit everyone?

Announced ahead of each sowing season, the MSP is intended to guide farmers’ cropping decisions. However, in reality the benefits accrue largely to rice and wheat growers in regions with strong procurement infrastructure.

A Lok Sabha reply ³by the Department of Food and Public Distribution in 2020, indicated that for the year 2019-20, 43% of rice and 36% of wheat produced was procured by government agencies. On the contrary, procurement of coarse grains and pulses stood at 1% and 12.2% of their production respectively. The procurement of foodgrains is largely concentrated in a few states. The three states, Madhya Pradesh, Punjab, and Haryana, that produce 46% of the wheat in the country account for 85% of its procurement. For rice, six states including Punjab, Telangana, Andhra Pradesh, Chhattisgarh, Odisha, and Haryana with 40% of overall production boast a 74% share in paddy procurement. ⁴

Changing consumption patterns

Production of rice and wheat have increased significantly (see Table 1). Consequently, between 2004 and 2024, their availability per person per month has increased 17% and 26%, respectively, even while its consumption has seen a secular decline across rural and urban areas (see Table 1). This evolving pattern raises the question whether a legally guaranteed procurement on MSP – an idea supported in some quarters – constitutes sound policy.

Distortionary impact of MSP

MSP, while well-intentioned, disrupts the natural market signals that guide production decisions. In a free market, farmers respond to consumer demand and price signals, shifting to profitable crops that are in demand. However, MSP guarantees a fixed price for specific crops such as rice and wheat, regardless of market dynamics. This creates a perverse incentive for farmers to overproduce these crops, even when demand is stagnant or declining. This overproduction leads to surplus stocks⁵, with FCI godowns far exceeding buffer stock norms. In April 2024, godowns stored 37.65 MMT of rice and wheat as against a buffer stock norm of 21 MMT.

The Economic Survey 2019-20 ⁶dedicated a chapter on government interventions undermining markets as opposed to helping it. The survey found that the increasing trend in MSP over the years has served to give a signal to farmers to opt for crops that have an “assured procurement system”. The survey also argues that the economic cost of FCI for acquiring, storing and distributing foodgrains is about 40 per cent more than the procurement price, and the current mix of policies of assured procurement , storage and distribution under PDS have created a costly foodgrain economy. The union government spent Rs. 2.11 lakh crore on food subsidies⁷ in 2023-24, a significant portion of which was for procuring and storing surplus grains. This crowds out investments in agricultural infrastructure, research, and market reforms.

Way Forward

To address the distortion, India needs a phased transition from MSP to market-oriented policies that incentivise diversification and sustainability. Direct transfer of money to poor families to buy food will eliminate wastage in food subsidies and create rational price incentives to farmers to switch over to crops based on price signals.⁸ At the macro level, organised retail chains directly linking farmers to consumers, eliminating dependence on middlemen and dilapidated APMC (Agriculture Produce Market Committees) system, and ensuring institutional credit and crop insurance will make agriculture truly remunerative. We should remember that 46% of our workforce⁹ derive their incomes from agriculture. As long as agriculture remains non-remunerative, consumption of industrial and manufactured goods in large parts will remain subdued. In a challenging and rapidly evolving global order, a dynamic and globally competitive agricultural economy will not only anchor our overall economic stability but also drive inclusive growth, enhance food and nutritional security, and create millions of jobs across allied sectors.