Agriculture & Commodity Markets
Minimum Support Prices and Government Procurement
How India's minimum support prices guarantee farmers a floor price for certain crops, how procurement works, and the debate over its effects.
In India, the government announces minimum support prices, or MSPs, for a set of crops before each sowing season. The idea is to give farmers a guaranteed minimum price, so they are protected if market prices fall too low.
How it works
The Commission for Agricultural Costs and Prices recommends MSPs for around two dozen crops, based on production costs and other factors. Since 2018, the government has said MSPs are set at least 1.5 times a measure of farmers’ production costs.
An MSP only helps if someone actually buys at that price. For wheat and rice, the Food Corporation of India and state agencies buy large quantities through procurement. This grain supplies the public distribution system, which provides subsidised food to hundreds of millions of people, and builds buffer stocks for emergencies.
Uneven benefits
Procurement is concentrated in a few crops and states. Farmers in Punjab, Haryana and Madhya Pradesh, where procurement systems are strong, sell large amounts at MSP. In many other states, and for most other crops, farmers often sell below MSP because there is little procurement. Surveys have found that only a minority of Indian farmers sell at MSP.
The debate
Supporters argue MSPs protect farmers from price crashes and support food security. Critics point out that guaranteed purchase of wheat and rice encourages farmers to keep growing these water-intensive crops, even in water-scarce regions, and leads to very large, costly grain stocks. Farmers’ protests in 2020 and 2021 included demands for a legal guarantee of MSP.
If the MSP for wheat is set above the market price, farmers in states with procurement centres sell to the government and receive the higher price. The government must then store, transport and distribute the grain. The farmers gain, but taxpayers bear the cost, and farmers have less reason to switch to crops the market needs more.
The MSP is announced for many crops, but only farmers who can sell to government procurement agencies reliably receive it. For most crops and in many states, market prices, not MSPs, determine what farmers earn.
- MSPs are guaranteed minimum prices announced for around two dozen crops.
- Government procurement of wheat and rice supports the public distribution system and buffer stocks.
- Benefits are concentrated in a few states and crops.
- MSPs protect farmers but can encourage water-intensive crops and large grain stocks.
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