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Impact of Minimum Support Prices on Indian Oilseeds

Agriculture, with 58% population dependent on it, continues to be India’s backbone. In 2020-21, agriculture constituted 19.90% of GDP up from 17.80% in 2019-20 on the back of reforms to improve production. Continuing land reforms, initiation of price support policies, introduction of new technologies, and access to agricultural research along agricultural administrative changes has helped this transformation.

One of the corner stones of managing agriculture has been the Minimum Support Price (MSP) which has been in vogue from 1966-67. The MSP mechanism guarantees a fair minimum price to farmers for their produce before sowing commences. The price is arrived basis the recommendations of the Commission for Agricultural Costs and Prices (CACP). The twin governmental objective of the MSP is to support farmers from distress sales and to procure food grains for public distribution. MSP has proved to be a safety net to ensure price security for farmers. This encourages higher investment and production of agricultural commodities.

The minimum support prices (MSP) cover 25 commodities including Fair and Remunerative Price (FRP) for sugarcane. The Kharif crops include Paddy, Jowar, Bajra, Maize, Ragi, Arhar, Moong, Urad, Cotton, Groundnut, Sunflower seeds, Soyabean, Sesamum, Niger Seed and Rabi Crops are Wheat, Barley, Gram, Masur (Lentil), Rapeseed/Mustard, Safflower, Torai, Copra, De-husked Coconut and Jute.

Table 1: MSP Prices of Oilseeds

Commodity 2010 -11 2011 -12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21
Groundnut 2300 2700 3700 4000 4000 4030 4220* 4450^ 4890 5090 5275
Sunflower Seed 2350 2800 3700 3700 3750 3800 3950* 4100* 5388 5650 5885
1400 1650 2200 2500 2500 3050^ 3399 3710
1440 1690 2240 2560 2560 2600 2775* 3880
Sesamum 2900 3400 4200 4500 4600 4700 5000^ 5300* 6249 6485 6855
Nigerseed 2450 2900 3500 3500 3600 3650 3825* 4050* 5877 5940 6695
Rapeseed & Mustard 1850 2500 3000 3050 3100 3350 3700* 4000* 4200 4425 4650
Safflower 1800 2500 2800 3000 3050 3300 3700* 4100 4945 5215 5327

^ Including Bonus of Rs. 200 per quintal
* Including Bonus of Rs. 100 per quinta
Source: Farmer’s Portable, Department of Agriculture & Cooperation and Farmers Welfare

In respect of food crops like wheat and rice, massive progress has been seen in terms of yield and overall production. But, comparatively, other crops particularly oilseeds, pulses, and coarse cereals has lagged. To address this malady, increase in MSP for all these crops has been consciously favoured from 2007-08. Various bonus incentives were also given in 2016-17 and 2017-18.

While recommending MSP, CACP considers various factors viz. cost of production, overall demand-supply situations of various crops in domestic and world markets, domestic and international prices, inter-crop price parity, terms of trade between agriculture and non-agriculture sector. The likely effect of price policy on rest of economy, rational utilization of land, water and other production resources and a minimum of 50% as the margin over cost of production is also taken into account. The views of the farmer and farmer’s association are also considered by CACP before recommending MSP.

Besides, announcement of MSP, the Government also organizes procurement operations of these agricultural commodities through various public and cooperative agencies. NAFED, Central Warehousing Corporation (CWC) National Consumer Cooperative Federation of India Ltd. (NCCF), Small Farmers Agribusiness Consortium (SFAC) are the central agencies for procurement of oilseeds & pulses. The government stores the grains procured from the farmers with the FCI (Food Corporation of India) and NAFED (National Agricultural Cooperative Marketing Federation of India) from where the grains are distributed to the poor under the Public Distribution System (PDS).

India occupies a prominent position with both acreage and production in oilseeds. Though the country is gifted with such rich diversity and increased efforts by the government, the domestic production of oilseeds has remained stagnant over the years. This is a huge cause of concern.

Chart 1: Domestic Oilseed Production

Source: IOPEPC Trade Estimates

The disparity between the demand and the supply of vegetable oil has to be met via imports. Vegetable oils constitute more than half the import of agriculture products in India. The situation of oil seed sector in the country is perplexing with a sluggish and erratic growth in the production of oilseeds. The country did not see any major improvement in the oilseed production and has not been able to make a satisfactory leap in this sector during the last decade. Booming populations with higher income have further increased the domestic consumption of edible oils, which has resulted in rise in imports.

Chart 2: Total Vegetable Oil Imports

Source: SEA of India

The Agricultural price policy envisaged adoption of new technology to increase yields to usher in food security. For the farmer, it ensured price security for long term investments. At the end of the cycle, the farmer is also a consumer with an impact of increase/decrease of price of farm produce.  

States have differing capabilities to procure. Farmers in Haryana and Punjab receive higher prices than those based in the East Indian states. This unavailability of procurement agencies and local purchasers were reported as the major reason for farmers not selling their produce to procurement agencies. This discriminatory policy hugely disincentivised growing these crops, resulting in huge deficits and high-import dependency. This has seen only 6% of the crops being purchased with the MSP mechanism.  

Over the years, the government has actively been studying the impact of MSP with the help of various agencies. A survey covering 18,267 farmers spread across 19 states conducted by Goan Connection Foundation discovered 43.60% felt the biggest problem for them was not getting the right price.

The price of any crop decided by the central government remains the same all over the country. This is also a major reason why the farmers are not able to get the benefit of the MSP, because the cost of cultivation varies across states. Apart from the cost, production output varies too. The major reason behind the cost of production is the wage rate which varies in every state.

Bhavantar Bhugtan Yojana (BBY) was introduced in Madhya Pradesh to tackle shortcoming of the MSP which resulted in unrest in farmers. From initial eight crops mainly oilseeds and pulses, later on 13 kharif crops got covered. Under this scheme, farmers had to register at mandis with details such as their landholding, bank accounts, and projected produce. They were eligible only if they sold their produce during a particular window in the mandi where they had registered themselves. The actual difference in the selling price and the modal rate was deposited directly in their bank accounts. Periodic review of the scheme revealed shortcomings leading to it being scrapped.

Extending MSP to all farm produce and guaranteeing it through law is hugely challenging, fiscally and logistically. Despite all challenges, the government undertaking to buy at MSP is definitely better than forcing private players. The Telangana government’s Rythu Bandhu scheme is gaining popularity where direct cash transfers either on a flat per-acre goes into the bank account. The Pradhan Mantri Kisan Samman Nidhi where per-farm household criteria are mooted is another idea whose time has come. Economist are of the opinion these innovative schemes will wean farmers to look away from only paddy and wheat to other crops especially oilseeds.

Time will tell if this becomes a reality in India.

Prepared by: Bhavna Shah 

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