Agrarian reforms: Can over-reliance on MSP harm agricultural states?

Dependence on MSP-led procurement of grains has led to low crop diversification in states like Punjab, keeping farmers from reaping the benefits of high-value crops

Agrarian reforms: Can over-reliance on MSP harm agricultural states?
By focusing on lower-valued crops, Punjab is missing benefits of diversification that Bihar is tapping on. (Representative image)

Co-authored with Siraj Hussain, Senior Visiting Fellow, ICRIER

Farmer agitations against the recently promulgated farm Bills are growing in northern states of Punjab, Haryana, Madhya Pradesh, and Uttar Pradesh. Interestingly, these are states benefitting most from the government’s MSP operations. What are their concerns, and if any underlying assumptions guide those? We explore this and more in this article.

On June 5, the president of India promulgated three Ordinances for improving the farming environment in the country. Most contentious of the three is the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance 2020 (FPTC).

Indian agricultural markets are studied to have suffered at the hands of oligopolistic APMC traders/middlemen. The FPTC Bill provides an alternate to state APMCs and offers the freedom to sell and purchase agri-produce to both farmers and buyers. By creating alternate and competing markets, which do not levy taxes/fees, FPTC will help farmers by reducing transaction costs, increasing transparency, and improving their share in consumer’s rupee.


The biggest issue of agitating farmers is that they were not consulted while framing these Bills. They fear that with the implementation of FPTC, among other things, state APMCs will slowly die due to constraints of resources, leaving farmers to the whims of ‘exploitative’ traders and corporate buyers. Farmers also equated the Bill with the eventual phasing-out of government’s MSP operations, but those fears were allayed by PM Modi, who confirmed their continuity.

According to us, there are two basic assumptions of these agitating farmers. For them, the only alternative to APMC is a ‘villainous’ and ‘exploitative’ corporate buyer/trader. And, by producing MSP crops (mainly rice and wheat) and selling them in assured markets at assured prices, farmers think they are maximising their gains and are safeguarded for future.

We visit both assumptions below. Repeated reference is of two states—Punjab and Bihar. These represent two extreme examples—Punjab, on the one hand, has a robust procurement system, and financially thriving APMCs (used mainly for procurement), Bihar on the other, had repealed APMC in 2006 and has a relatively small and insignificant level of procurement operations.

Let’s start by looking at data on farmer incomes.

NAFIS or NABARD All-India Rural Financial Inclusion Survey 2016-17 report gives state-wise estimates of farmer incomes and its components, for 2015-16. We use the income component that farmers earned from cultivation activities. By dividing this income with average landholding size in the state (taken from GoI’s Agriculture Census 2015-16), we get a state-wise estimate of incomes generated per hectare (see graphic).

Let’s take a closer look at Punjab, Bihar, and Kerala. Their average monthly income from cultivation were: Rs 12,481, Rs 1,652 and Rs 6,284, respectively, and average landholding sizes were: 3.62ha, 0.39ha, and 0.18ha. Upon dividing respective incomes with sizes, we find that on per hectare basis, Kerala farmers generated the highest incomes (Rs 34,910), followed by Bihar (Rs 4,236) and then by Punjab (Rs 3,448). Even though a Punjab farmer earns more than a Bihar or a Kerala farmer, average incomes generated from every hectare in the state are much lower (perhaps, large differences in landholding sizes between these states could mathematically explain this counterintuitive trend).

But how can farmers in Bihar, for example, generate more income per hectare than in Punjab?
We looked at what crops were produced in these states using data on the value of output (VOO) from GoI. In 2015-16, Punjab’s agricultural output (current prices) valued at about Rs 1.3 lakh crore and Bihar’s at Rs 1.1 lakh crore. While Punjab’s agricultural basket emerged cereal-centric, Bihar’s was more diversified (see graphic). Cereals constituted only 40% share in Bihar, but 70% in Punjab. Share of fruits and vegetables (F&V) in Bihar was high at 35%, but only 11% in Punjab. Bihar also generated higher value from pulses, oilseeds, sugarcane, among others, unlike Punjab.

Cereals are low-valued crops compared to F&V, oilseeds, or pulses. In 2019-20, MSPs of major cereal crops were below Rs 20/kg (wheat Rs 19.25/kg, paddy Rs 18.35/kg, maize Rs 17.6/kg). But for pulses, MSPs averaged Rs 60/kg (gram Rs 48.75/kg, moong Rs 70.5/kg, tur Rs 58/kg), and for oilseeds, MSPs averaged Rs 44/kg (groundnut Rs 50.9/kg, soybean Rs 37.1/kg, mustard about Rs 44.25/kg). Average yearly prices of F&V are also higher than cereal prices.
By focusing on lower-valued crops, Punjab is missing benefits of diversification that Bihar is tapping on.

Kerala is another striking example. With the smallest landholding size in the country (less than 0.2ha), the state generates the highest per hectare incomes (about Rs 35,000/month) (see graphic). What does it produce? Condiments, spices, and coconuts, mainly. Prices of spices range between Rs 300 to Rs 1,500/kg, and MSP of coconut or copra (ball) was Rs 99/kg (2019).

Interestingly, both Kerala and Bihar do not have APMC systems. Bihar does not even have robust MSP procurement machinery. In 2018-19, GoI procured about 13 million metric tonnes (MMTs) of wheat and 11MMTs of rice (about 71% and 88% of state’s wheat and rice production) from Punjab. In Bihar, they procured about 3 thousand MTs wheat and about 1MMTs of rice (about 0.05% and 15% of state wheat and rice production).

Government’s procurement at MSP offers assured markets to farmers. This market assurance encourages the majority of Punjab farmers to continue producing wheat and paddy year-on-year. As Bihar farmers do not have this assurance, they produce diversified crops. Despite a considerable advantage in the size of operational holdings, Punjab is unable to recover a high value on every hectare.

Besides, MSP is not the right remuneration benchmark, and there is only as much growth that GoI’s MSP operations will see going forward. Driven by environmental or economic factors, states dependent on paddy-wheat cropping patterns should consider diversifying their production baskets, and FPTC will facilitate triggering opportunities.

What now?
By opening space for providing alternate marketing channels, the government seeks to provide a level-playing field to farmers. States like Bihar should build on their enterprising farmers and immediately improve rural infrastructure and marketing facilities, and states like Punjab should look at devising ways to leverage benefits from diversification. The government might handhold farmers and provide checks and balances together with a robust grievance redressal mechanism until farmers establish benefits of the new system. Likewise, the government should work with state governments to customise programmes for different regions.

Given that agriculture is a state subject, the government will do well by engaging with stakeholders. Only with consensus and convergence can the Bill reach where it is rightly positioned and intentioned to reach.

Saini is senior consultant and Hussain is senior visiting fellow, ICRIER. Views are personal

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