MSP, Procurement, Buffer Stocks and the PDS

Minimum Support Price (MSP)

What MSP is: the price at which the government commits to buy a crop from farmers, to protect them against a price crash. It is a policy announcement, not a legal entitlement.

Who sets it:

• the Commission for Agricultural Costs and Prices (CACP), set up in 1965 as the Agricultural Prices Commission, recommends MSPs. It is an attached office of the Ministry of Agriculture, not a statutory body;
• the Cabinet Committee on Economic Affairs (CCEA) announces them.

Coverage: MSPs are declared for 22 mandated crops:

• 14 kharif: paddy, jowar, bajra, maize, ragi, tur, moong, urad, groundnut, soybean, sunflower, sesamum, nigerseed and cotton;
• 6 rabi: wheat, barley, gram, masur, rapeseed and mustard, and safflower;
• 2 commercial: jute and copra.

Sugarcane has a separate Fair and Remunerative Price (FRP), which mills must pay under the Sugarcane (Control) Order 1966. Several states announce higher State Advised Prices.

Factors the CACP considers:

• cost of production;
• demand and supply;
• domestic and international prices;
• inter-crop price parity;
• terms of trade between agriculture and non-agriculture;
• the implications for consumers.

Cost concepts:

• A2: paid-out costs (seeds, fertilisers, hired labour, machinery, fuel, irrigation).
• A2+FL: A2 plus the imputed value of family labour.
• C2: comprehensive cost, which adds the imputed rent on owned land and interest on owned capital to A2+FL.

The 2018–19 Budget fixed MSP at at least 1.5 times A2+FL. The National Commission on Farmers (Swaminathan Commission, 2004–06) had recommended C2 + 50%. Farm unions demand C2-based MSP with a legal guarantee.

Procurement

Agencies: the Food Corporation of India (FCI), set up in 1965 under the Food Corporations Act 1964, and state agencies.

Decentralised procurement (DCP): since 1997–98, states procure, store and distribute grains themselves, with the Centre bearing the cost.

How effective is MSP? Effective procurement is concentrated in:

• wheat and rice;
• a few states: Punjab, Haryana, MP, Telangana, Chhattisgarh and Odisha.

The Shanta Kumar Committee (2015) estimated that only about 6% of farmers sell at MSP to procurement agencies. Many farmers in Bihar, UP and eastern India sell below MSP.

PM-AASHA (2018): a scheme to ensure MSP for pulses and oilseeds. Its components:

• the Price Support Scheme (PSS): physical procurement by NAFED and NCCF;
• the Price Deficiency Payment Scheme (PDPS): pays the difference between MSP and market price, piloted by MP as Bhavantar Bhugtan Yojana (2017);
• the Private Procurement and Stockist Scheme;
• a Price Stabilisation Fund.

In 2024 PM-AASHA was continued, and the Centre assured 100% procurement of tur, urad and masur for four years through NAFED and NCCF.

Buffer stocks

Purpose: food security (the PDS) and price stabilisation (open market sales when prices rise).

Norms: buffer stock norms are set quarterly. For example, about 41 million tonnes of wheat and rice on 1 July. Actual stocks often far exceed the norms, which leads to:

• high carrying costs (FCI's economic cost of grain is well above MSP);
• storage losses.

Open Market Sale Scheme (OMSS): FCI sells surplus wheat and rice to bulk buyers to cool prices, as in 2023–24. It also supplies Bharat Atta and Bharat Rice at subsidised rates.

Public Distribution System (PDS)

Evolution:

• a wartime rationing system (1940s);
• Revamped PDS (1992);
• Targeted PDS (1997, with BPL and APL categories);
• Antyodaya Anna Yojana (2000, for the poorest);
• the National Food Security Act 2013.

NFSA 2013:

• covers up to 75% of rural and 50% of urban population, about 81 crore people;
• 5 kg of grain per person per month for priority households;
• 35 kg per AAY household;
• provides for maternity benefits (₹6,000), mid-day meals and ICDS nutrition;
• the eldest woman (18+) is the head of household for ration cards;
• includes grievance redress (District Grievance Redressal Officers, State Food Commissions).

PMGKAY: free food grains under PM Garib Kalyan Anna Yojana. Introduced during COVID (April 2020) as extra grain, it was merged with NFSA in January 2023, making NFSA entitlements free. It was extended for five years from 1 January 2024.

Reforms:

• Aadhaar seeding and ePoS devices;
• One Nation One Ration Card (ONORC), operational in all states and UTs by 2022, which lets migrants draw rations anywhere;
• fortified rice supplied through all schemes from 2024;
• DBT in food piloted in Chandigarh, Puducherry and Dadra and Nagar Haveli.

Food subsidy: about ₹2 lakh crore a year.

Debates

A legal guarantee for MSP: this was the core demand of the farmers' protests of 2020–21, which led to the repeal of the three farm laws in November 2021.

Arguments for a legal guarantee:

• income security for farmers;
• price discovery in thin markets;
• correcting distress sales.

Arguments against:

• fiscal cost;
• market distortion (more production of MSP crops, leading to surplus stocks);
• WTO limits on amber box support;
• problems of quality and storage;
• crowding out of private trade.

Alternatives:

• price deficiency payments;
• income support (PM-KISAN);
• MSP as a reference price for private trade;
• crop-neutral support per hectare (Telangana's Rythu Bandhu model).

Shanta Kumar Committee (2015) on restructuring FCI:

• hand procurement over to states that are already efficient, and focus FCI on eastern states;
• reduce NFSA coverage to about 40%;
• move to cash transfers;
• outsource storage;
• give negotiable warehouse receipts.

Common prelims traps

• The CACP is an attached office, not a constitutional or statutory body.
• MSP is announced by the CCEA, not by the CACP.
• FRP for sugarcane is set under the Essential Commodities Act framework (the Sugarcane Control Order), not as MSP.
• NFSA covers 75% rural and 50% urban.

Quick self-test

1. *What is A2+FL?* Paid-out costs plus the imputed value of family labour.
2. *What does PDPS do?* Pays farmers the difference between MSP and market price, without physical procurement.
3. *Who is the head of household under NFSA?* The eldest woman aged 18 or above.

Practice: Mains question

*"Should MSP be given a statutory guarantee?" Critically examine the economic and fiscal implications. (250 words)*

How MSP shapes cropping decisions

Rice and wheat: where procurement is assured, as in Punjab and Haryana, farmers grow these crops almost exclusively, even where groundwater is falling. The MSP acts as an insurance against price risk, so farmers are reluctant to switch to crops without it.

Pulses and oilseeds: MSPs have been raised more sharply in recent years than those for cereals, and procurement has expanded through PM-AASHA. This is meant to change relative returns, but without assured purchase the signal is weak.

Policy lesson: MSP is effective only when backed by procurement or price deficiency payments. Otherwise it is a notional price.

Leakages and targeting in the PDS

Leakage: estimates using NSS data (Gulati, Saini and others) suggested that leakage of PDS grain fell from about 46% in 2011–12 to about 22–28% by 2022–23, as states digitised supply chains and enforced Aadhaar authentication. Treat these as estimates.

Exclusion errors: about 10 crore people may be left out because NFSA coverage is based on Census 2011 population figures. The Supreme Court in the migrant workers case (2021–24) asked the Centre and states to issue ration cards to workers registered on e-Shram.