Cultivation of Wheat in India: Is Minimum Support Price Collapsing the System?
A few days after the government announced an increase in the Minimum Support Price (MSP) of
Kharif crops, the country is reminded of the 2020-2021 farmers’ protests where discontented
farmers, protesting on the borders of Delhi, remained determined to get back the legal umbrellas
protecting them.
The controversial farm laws proposed by the government earlier proposed a removal of the
threshold to liberalize the market and encourage economic growth. However, the new laws
induced a fear of products being undervalued in Indian farmers.
Against all odds, the government had to repeal the newly-introduced farm laws. However, the
question remains: does MSP really meet the claims of supporting farmers for a staple produce
such as wheat? What happens if there is no MSP?
Introduction to MSP
The MSP, a minimum price guarantee for farmers produce, is calculated based on many factors
such as cultivation cost, estimated labor value, production cost, etc. MSP is usually declared by
the government before the cultivation of crops begins, with an aim to secure farmers (through
govt. purchase at MSP) in case market price falls below MSP.
Wheat in India
The production of most consumed rabi crop, wheat, is dependent on many factors, such as
cultivated area, seeds price, fertilizers, climate conditions, crude oil prices, etc. This year India,
second largest producer (106 million
tonnes in 20221 ) and consumer of
wheat, is hoping to produce 112 million
tonnes and farmers have sown wheat
over 34 million hectares all over the
country.2
We found wheat supply to be elastic by
looking at factors like cultivated area,
seed and fertilizer price, human and
technological labor- meaning wheat
production is increasing, but the
rate of price increase is lesser.
The demand for wheat, however, is
an entirely different case. Looking at
past 20 years data suggests it to be
inelastic, meaning that higher prices
will not reduce consumption.
Demand is driven by factors such as
income, population, and prices of
substitutes (rice, ragi, bajra etc.)
The impact of MSP on the
demand and supply of wheat
Ideally, the demand and supply of wheat should determine the price at which it should be sold as
seen in Fig 3. However, government intervention by procurement of D-D’ quantity at MSP
increases the selling price and changes the supply curve from S to S’ as seen.
Based on the figure, we find that where MSP will settle depends mostly on the shift of the demand
curve, i.e. how much is the government able
to procure from farmers.
As far as supply is concerned, MSP has a
much greater impact. Our analysis showed
that MSP announcement can sway the
amount of wheat produced. Given the MSP is
announced to be ₹2125 per quintal3, the
model predicts the wheat production this year
to be approximately 115 million tonnes.
Does MSP have a similar impact on other crops?
The government announces MSP for 23 crops, but only procures wheat and paddy. In 2022-23,
FCI procured 18.79 MT, with 98% of the wheat procurement from Punjab, MP & Haryana. 4 MSP
reach is limited to wheat-producing regions.
We studied wheat & other crops to see if MSP impacts production.
We found that despite little variation in MSP announced for these crops, the production wasn’t as
high as compared to rice and wheat. The MSP appears biased against farmers that grow other
coarse cereals such as ragi and barley and oilseeds. This difference has led to distortion in
production of cereals in the country. According to a paper5, coarse cereals have disappeared from
the modern Indian diet.
As MSP dictates market price for wheat, market price increases with it, which may lead to food
price inflation. Farmers, influenced by MSP, prefer growing one crop over the others, which results
in changes in soil conditions and over-exploitation of water resources, leading to ecological
damage.
Moreover, given the bumper harvest of
wheat and India’s ban on wheat export
due to the Russia-Ukraine conflict, India
now faces a problem of surplus. With
exports banned, the government ends
up as a major buyer from farmers and
has limited storage capacity. The
storage capacity available with the FCI
and the state agencies stands at 96.73
million tonnes6, a large portion of which
is already full of earlier stock. As a result,
a considerable amount of wheat might go waste.
All these adverse effects from
MSP could still be forgiven to a
degree if the farmers benefited.
According to the FCI, about
17,83,192 farmers reaped the
benefits of MSP in 2021-22 and
are present in no more than 10
states.7 MSP is now discouraging
farmers to diversify their crops
and getting a better return on
costs.8
References:
1. CMIE Commodities: Wheat https://commodities.cmie.com/index.php?
2. Wheat production in India is set to jump to a record on higher planting area,
https://www.livemint.com/industry/agriculture/wheat-production-in-india-is-set-to-jump-toa-record-on-higher-planting-area-11673337708616.html
3. Minimum Support Price of Paddy, Wheat and Coarse grain, Food Corporation of India,
https://fci.gov.in/procurements.php?view=89
4. Wheat procurement for central pool (marketing season wise), Food Corporation of India,
https://fci.gov.in/app/webroot/upload/Procurement/3.%20Wheat%20state%20Procureme
nt%202023-24_3.pdf
5. Eliazer Nelson, A.R.L., Ravichandran, K. & Antony, U. The impact of the Green Revolution
on indigenous crops of India. J. Ethn. Food 6, 8 (2019) https://doi.org/10.1186/s42779019-0011-9
6. Economic
Survey
of
India,
2021-2022,
https://www.indiabudget.gov.in/economicsurvey/ebook_es2022/index.html#p=287
7. Number of Farmers Benefited, Statewise, Marketing Seasonwise (Paddy and Wheat),
Food
Corporation
of
India,
https://fci.gov.in/app/webroot/upload/Procurement/5.%20No%20of%20farmers%20benfit
ed_12.pdf
8. CMIE Commodities: Wheat https://commodities.cmie.com/index.php?