MSP Guarantee: Unraveling the Multi-Faceted Impact on Government Expenditure, Farmer Income, and Consumption Demand”

Quote on MSP from Pushan Sharma, Director-Research, CRISIL Market Intelligence & Analytics

If the government procures the entire production of 23 crops for which minimum support price (MSP) has been announced, the impact will be multi-pronged.

For the exchequer, this will mean materially higher expenditure.

Considering the government will procure only crops trading in mandis below the MSP,  our calculations show it will need a working capital of ~Rs 6 lakh crore in Marketing Year (MY) 2023. We considered 16 of 23 crops, which account for over 90% production of the field crops, for the analysis.

The real cost to the government, though, will be the difference between MSP and mandi prices, which works out to around Rs 21,000 crore for MY2023.

The cost could be higher if the government offloads the commodities in mandis because then prices could fall further than what was seen in those markets in 2022-23, which we have used to calculate the government’s bill.

Of the 16 crops tracked, eight traded higher than MSP and hence would not require procurement; the cost estimations reflect procurement for the remaining 8 crops that traded below MSP.

For farmers, it would mean cash support during times when prices plummet below MSP. It will also give them the freedom to sow crops of their choice and be more amenable to their local conditions.

The reasons are not far to seek.

While MSP is announced for 23 crops, the government ends up meaningfully procuring only two crops — paddy and wheat — and hence over 60% of field crop production in India comes from only these two crops (excluding sugarcane) as farmers tend to opt for these given the MSP support and lack of risk appetite for other crops.

If we look at kharif 2022 and rabi 2023, 41% of the paddy and 24% of the wheat produced during the year was procured. Next came mustard, where 9% of production was procured. Eight crops did not need procurement at MSP as their mandi prices were higher. For the remaining 5 crops, procurement was less than 3% of the production.

In this milieu, guaranteeing MSP for all crops can lead to farmers moving to crops other than paddy and wheat, which see the maximum procurement.

Another critical aspect to consider is that procurement is concentrated in only a few states, such as Punjab, Haryana, Madhya Pradesh, Chhattisgarh, Telangana and Uttar Pradesh, so farmers in other states don’t get the benefit of MSP. Hence, guaranteeing MSP across crops will lead to percolation of the benefit across the country. It will support farmer income and thereby also give a push to consumption demand.

On the inflationary side, though, a few crops could see an upmove in prices if the mandi prices are much lower than MSP.

 

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