The other side of the Minimum Support Price (MSP)

India is in the doldrums with the recent farmers’ protest who seek the legalization and diversification of Minimum Support Price (MSP). This looks like a noble cause as agriculture contributes 15% of India’s GDP and accounts for 45% of the employment rate. However, what are the repercussions to the economy?

1. Well for starters, the government buys excess rice and paddy from the market however, as their purchase is not based on consumption needs they end up having storage issues. The government purchased 55.8mn tonnes of rice in 2022-23. Under the PMGKAY scheme, approximately 5kg of rice/per month is distributed to over 80 cr Indians. This means the yearly requirement for rice is 48mn tonnes which still leaves an excess of 7.8mn tonnes leading to storage issues and pilferages.

2. Diversification issues, just like a good portfolio should be diversified, producing one kind of crop leads to environmental stress and irrevocable damages. Does extending the ambit of MSP help with this issue? Surely if MSP is extended to multiple crops, farmers will produce what they want, thereby reducing environmental stress. This will lead to immense infrastructure hassles. Bear in mind storing rice and fresh vegetables is not the same thing. Vegetables will need different sorts of warehouses with temperature control, also the shelf life will be way lower and the government will need to dispose of them faster.

3. The WTO angle, India is already breaching the WTO norm which states that the agriculture subsidy can’t be more than 10% of the value of agri production. Increasing the scope of MSP will lead to further violations. This will be seen as an attempt to create barriers against exports from other countries to India, this will have its own sets of repercussions for global trade. The norms of WTO are not perfect but needless to remind a lot of our sectors (IT, Auto, Pharma, Gems, etc) can access foreign markets as WTO helped remove the trade barriers.

4. Pocket cost, the Food and fertilizer subsidiary is INR 3.69 lakh cr whereas our combined health, energy, and education budget is INR 2.90 lakh cr. Our defense budget is a little over INR 4.50 lakh cr. It is estimated that accepting the new MSP law will lead to spending of INR 9-10 lakh cr which will be equal to the infrastructure spending. Should the government stop spending on infrastructure or raise more debt?

Some situations don’t have clear answers and this is one of them….