'MSP has served its purpose, must go': Top economist warns of rising economic costs

The minimum support price (MSP) system that once helped India achieve food security must now give way to market-aligned mechanisms, says Dr Ashok Gulati, a leading agriculture economist and former chairman of the Commission for Agricultural Costs and Prices (CACP).

"MSP has served its purpose. It has lived its age and today we need to change and we need to change to different market-oriented, market-aligned options—futures, contract farming," Gulati said during a podcast conversation with Groww. "We are not in that situation today. Today we are the largest exporter of rice and even after giving free food, the FCI's godowns are three times more than the buffer stocking norm for rice. So if the policies don't change, they will inflict a heavy burden on society."

Tracing the origins of MSP, Gulati said it was introduced in the mid-1960s to support farmers during India's Green Revolution, when the country was importing 10 million tons of wheat under PL480 and introducing high-yielding Mexican seeds. "I did my PhD on MSP business and then I didn't know one day I’ll land up as the chairman of the prices commission there. So I have read it all through. That was a time when we were literally living ship to mouth," he said.

He recalled how the Food Corporation of India (FCI) was given the responsibility to procure grain so that falling prices wouldn't discourage farmers. "You would wonder, at that time the schools had to be closed. There was such a burst of grain that FCI was procuring but they didn't know where to keep it because there were no godowns. So the schools—primary schools—were closed and the first godowns in Punjab were the primary schools. Those classrooms became the godowns," he said.

"It took just six years for India to turn around from a hugely deficit to a self-sufficient nation in basic staples. It was the role of technology, of fertilizers and irrigation, and it was the role of minimum support prices."

But Gulati said the rationale no longer holds. "The type of milk—it's not the government that decides, but farmers and the processors come together and decide the price of milk. Fishery price is not decided by the government. If you have fruits, vegetables, and all these high-growth sectors, more nutritious food, all their prices are decided by different mechanisms. We need to invest more in getting those agriculture markets right and gradually get away from this so-called minimum support price, which was right in the 1960s and 70s but not more."

He also pointed out that globally, most countries have moved away from price subsidies to income transfers. "That is less distorting to the markets and that is where the dispute in the WTO and others is—either you invest more in R&D or if you want to give, give as income transfers, which don’t distort the markets as much as the price subsidies do."

Farmer unions - mostly in Punjab and Haryana - have been consistently demanding a legal guarantee for MSP across all crops, not just the 23 officially covered varieties. The demand gained momentum after the repeal of the three farm laws in 2021, with several protest groups calling for comprehensive procurement rights and price protection for every farmer, regardless of location or commodity.