Budget 2025: Why ‘full MSP’ is the right foot forward

As the Centre prepares for Budget 2025, one of the priorities to raise consumption demand – the main growth engine on a slow burn – is to raise the income of the agriculture workforce (farmers, tenant farmers and farm labourers). This calls for a rational and coherent farm policy, not a piecemeal and disparate set of measures, which have failed to deliver so far and to which the draft “National Policy Framework on Agricultural Marketing” is the latest addition (more of it later). India last announced its “National Agriculture Policy” in July 2000.

A full MSP regime is the right step forward – to ensure farmers get cost+50% profits on all 23 crops, which the Centre has been promising for many years. This is also what the CACP, NITI Aayog and Dalwai Committee of 2016 proposed, all in 2018, and Budget 2018 committed to. The non-fulfilment of this has led to multiple farmers’ protests, including the current one at the Punjab-Haryana borders of Shambhu and Khanauri.

About the full MSP regime

A full MSP regime doesn’t need not be a “legal” one (as asked for by the CACP, NITI Aayog and parliamentary panel of 2024) because the existing one is not a legal one but governed by the decades-old Procurement Policy. It also need not involve procurement because the price difference between MSP and the market can be reimbursed, as the PM-AASHA does now and as the NITI Aayog also proposed in 2017 (“price deficiency payment”).

Whether it should be based on the Centre’s formula of A2+FL+50% or the Swaminathan’s C2+50% that farmers seek is a matter for debate. The difference between the two is the addition of the rental value of land and interest on fixed capital in the latter.

Sure, a full MSP regime isn’t enough because it can’t help 55% of the total agricultural workforce –landless farmers (2011 Census). Given that only 9.85% of farmers sold their crops to procurement agencies in 2018-19 (SAS 2019, it may directly benefit all farmers but ensuring a stable market (at MSP) would help all.

The significance of the limited MSP that exists now (since 1965) – full procurement of wheat and paddy at MSP and limited procurement of pulses and oil seeds at MSP in a few states, not all – can’t be overstated. It pulled India out of the food crisis and made Punjab and Haryana farmers rich (lately Madhya Pradesh farmers). A 2020 study by the University of Pennsylvania demonstrated its efficacy against unregulated private (non-APMC) markets.

Cash handouts are temporary reliefs

Instead of honouring its commitment, the Centre launched two cash handout schemes to “double” farmers’ income (as it promised in 2016) in 2018 and 2019.

The ad hoc PM-AASHA scheme came in September 2018. It gives “deficit payment” (MSP minus market price) for pulses, oil seeds and copra (all covered by MSP). Investigating reports highlighted some flaws in it. One report of May 2024 revealed it was opposed by the NITI Aayog, a Centre’s study that looked into Madhya Pradesh’s “Bhavantar Bhugtan Yojana” of 2017 (deficient payment) which inspired it, and also by independent experts. Madhya Pradesh abandoned the scheme in six months (in March 2018) as it discovered cartelisation of traders and collusion among farmers, traders and officials.

Another investigation report of September 2024 revealed the PM-AASHA funds were used only around the 2019 and 2014 general elections; the Centre “did not spend a single rupee” at other times. The scheme was last extended in September 2024, ahead of the Haryana elections.

The PM-KISAN (cash transfer of ₹6,000) came in the interim Budget of 2019, ahead of the 2019 general elections. It violated the vote-on-account norm and was implemented with retrospective effect (December 1, 2018). Initially, it was rolled out for 120 million small and marginal farmers (less than 2 ha land), later extended to all farmers in May 2019 – taking the beneficiaries to “around 14.5 crore”.

But the PM-KISAN excludes the most vulnerable – landless farmers (55% of the total agricultural workforce). The Centre has no plans to include them.

This scheme is found to have benefited a large number of “ineligible” ones, across states. For example, the CAG’s August 2024 report on Assam said, “37 per cent of beneficiaries were found ineligible”. This is a pattern now found in Maharashtra’s “Ladki Bahin Yojana” in which the state detected “60 lakh” ineligible beneficiaries (24% of “2.5 crore registered beneficiaries”).

Cash handouts are not solutions – but temporary reliefs. Have they raised farmers’ income? Consider the latest reports:

1. The Parliament Standing Committee report of December 17, 2024, sought to (i) double the PM-KISAN transfers to ₹12,000 (ii) bring “MSP as a legal guarantee” for all crops and (iii) extend “seasonal incentives” to landless farmers.

2. PLFS report of September 23, 2024 (2023-24) showed reverse migration of workers to agriculture – up from the previous low of 42.5% in 2018-19 to 46.1% in 2023-24. Using its data on “self-employed” as a proxy for agricultural workers (who constitute 78.9% of “self-employed”), average monthly “earnings” fell from ₹14,792 in 2017-18 to ₹13,279 in 2023-24 (without indexing against inflation).

3. The NABARD report of October 10, 2024, shows a sharp rise in agricultural households – up from 48% in 2015-16 to 57% in 2021-22.

The last report tracking farmers' income was the SAS of 2019 which showed, farm household’s average monthly income from crops was ₹3,798 in 2019 (37.2% of total ₹10,218) – against ₹3,081 in 2013 (47.9% of total ₹6,427). This is a fall of (-)6.3% in ‘real’ income. It was around this time that farmers’ demand for full MSP picked pace.

This report also said, 50.2% of farm households were indebted – average debt of ₹74,121 – more than annual income from crops, livestock and non-farm earnings (₹6,155). The rest ₹6,155 came from “wages/salaries” (its share up from 32% in 2013 to 39.8% in 2019). No further SAS report has been released. Ironically, a Lok Sabha answer of December 3, 2024, said, that outstanding credits to farmers almost doubled in four years – from ₹13.93 lakh crore in FY20 to ₹25.47 lakh crore in FY24.

PMO’s bid to bring full MSP in 2018

The PMO tried to bring a full MSP regime (at A2+FL+50%) in January 2018.

Then Economic Affairs Secretary Subhash Garg revealed in his 2023 book “We Also Make Policy” that it didn’t materialise because of two concerns: (a) logistics required to handle 21 more crops and (b) additional procurement cost of “about ₹35,000 crore” (worked out by then CEA Arvind Subramanian and his team) – the difference between MSP and market prices for all 23 crops.

But were these the real hurdles? Unlikely. Consider the following.

The PM-AASHA launched months later (September 2018) – which doesn’t need logistics as a “deficit payment” is made. Also, the Centre has had enough funds to spare ₹35,000 crore. Budget documents show, in the same FY19, the Centre allocated ₹1,400 crore for the PM-AASHA and ₹20,000 crore for the PM-KISAN. The allocations went up to ₹76,500 crore in FY20 (₹1,500 crore for the first and ₹75,000 crore for the second). By December 6, 2024, the Centre had paid ₹3.46 lakh crore under the PM-KISAN alone.

Soon thereafter, the Centre cut corporate tax by ₹1.45 lakh crore (September 2019) and declared PLI subsidies (first in March 2020) – without industry even making a public demand (revealed later by the Finance Minister in September 2022), while farmers’ public demand was pending. The corporate tax cut hit the Centre’s revenues and PLI outlay (including DLIs for semiconductors) has risen to ₹3.56 lakh crore by December 2024.

Two other objections came from Ashok Gulati, former CACP chairman. He has argued, that inflation would rise by 25-30% and “legalising” MSP “would be a folly” because non-MSP sectors of livestock and horticulture have outperformed wheat and paddy in output growth. Both arguments are untenable.

Procurement of wheat and paddy at MSP is meant for subsidised PDS supply to the poor and buffer stocks for emergency. When inflation rises, these stocks are sold in open market to tame inflation. As for output growth, cropping area under wheat and paddy are almost saturated and their productivity plateaued in Punjab and Haryana (other states would decades to reach that level). No such limitations hamper output growth in the livestock and horticulture sectors.

It is surprising that the Centre has kept away from the current farmers (in Modi govt 3.0) sitting at the Punjab-Haryana borders for about 350 days as their “Delhi chalo” march was stopped there in February 2024.  Minister for Agriculture & Farmers Welfare Shivraj Singh Chouhan has left it for the Supreme Court to resolve and Solicitor General Tushar Mehta told the court that the Centre was wouldn’t like to engage only with one section of farmers (Punjab), even though it is concerned about farmers’ welfare. The court’s reminding the Centre of its commitment in 2021 and fasting farmer leader Jagjit Singh Dallewal’s appeals through the court’s panel and media have not moved the Centre.

That the court can’t resolve it is obvious. Recall its 2020-21 interventions during the Delhi siege against the three controversial farm laws (now withdrawn). The court stayed the laws but didn’t decide their constitutionality and set up a panel instead – which led to nowhere. At that time, the new laws had overshadowed the demand for MSP. Eventually, the Prime Minister withdrew the laws on his own in November 2021 (his famous ‘tapasya’ speech), ahead of the Uttar Pradesh election. This time, the court’s panel, set up in September 2024, doesn’t have specific terms and conditions but a general direction to look into the farmers’ grievances – which are known to all.

Income support for 55% of landless farmers

By ensuring 50% profit over cost, a full MSP regime will save a lot of money – on cash handouts, input subsidies and MGNREGS (used by landless and small and marginal farmers to survive).

The Centre’s FY25 (BE) bill for fertilisers is ₹1.6 lakh crore, for the PM-AASHA and PM-KISAN ₹66,438 crore and for the MGNREGS ₹86,000 crore.

Imagine how rural consumption demand will go up if the savings from these schemes get into the hands of landless farmers (55% of the total agriculture workforce).

Fixing agricultural market and trade

On January 10, 2025, Ashok Gulati (mentioned earlier) cited an OECD report of November 2024 to say that India’s “inherent consumer bias” makes India “the only country” among G20 that has “negative Producer Support Estimates (PSEs), meaning that India implicitly taxes its agriculture by suppressing market prices”.

Indeed, the OECD report shows, India has the highest “negative market support” (implicit tax) among 54 countries it tracked – at $120.992 billion in 2023; a trend, it said, is seen “throughout the last two decades”. Gulati himself had led one such study (OECD-ICRIER, 2018) which said, Indian farmers lost ₹2.65 lakh crore per annum (at 2017-18 prices) or ₹45 lakh crore cumulatively for 17 years between 2000 and 2016.

To fix this ‘implicit tax’ on farmers, both domestic agriculture markets (state-controlled APMCs and private unregulated markets) and trade policy need fixing.

The draft “National Policy Framework on Agricultural Marketing”, circulated in November 2024, is aimed at the domestic market but seems vague. It does recognise the need “to put in place a mechanism to mitigate the uncertainties of market and price” but is silent on the key to doing it – ensuring trading at MSP in the private market to stop the exploitation of farmers. It promotes the private market while admitting that “so far, there is no independent study about functionality, benefits accruing from them and challenges being faced by private owners in operation and management of these markets”. It seeks to promote contract farming but mercifully, asks states to do it.

The draft is an improvement though. It recognises that agricultural marketing is “a State subject under Entry 28 of List-II” (which the 2020 farm laws didn’t) and emphasises the need to work with states to strengthen state-controlled APMCs (infrastructure), e-NAM, FPO etc.

The other area of trade (external) – marked by frequent and overnight bans and restrictions on exports and imports of wheat, rice, sugar, pulses, onions etc. – remains unaddressed.

The author writes on economics, governance and politics. His books include 'What Derailed the Indian Economy' and 'Attack on the Idea of India'. Views are personal.