SBI Report Recommends Alternate Approaches To MSP

As Finance Minister Nirmala Sitharaman gears up to present the first full budget of NDA 3.0, the debate over the future of Minimum Support Price (MSP) has once again gained momentum. The State Bank of India (SBI), in its research report, has called for an overhaul of the MSP mechanism.

While the SBI report has emphasised that MSP has been crucial in the price discovery mechanism, it has also highlighted its key shortcomings. The report focuses on MSP’s tendency to disincentivise private investment, lack of focus toward non-MSP crops along a reduction in export competitiveness.

Even though the MSP has been termed as a measure to ensure farmers receive a minimum price for their crops which protects them from market fluctuations, SBI has emphasised the factor that it leads to economic distortions. According to the report, the mechanism has disincentivised private investment, focused on limited crop varieties, and has impacted export competitiveness. The fiscal impact has been substantial as MSP-related expenditures reached Rs 3.4 lakh crore in FY23.

While the share of food grain in total agricultural and allied output is 17 per cent, the share of food grains that the government procures adds up to only six per cent of total output. As a result, vegetables, fruits, and livestock which represent a large portion of the agricultural output get minimal support.

The SBI has not only highlighted the concerns but has also recommended solutions in its report. It suggested that there should be a mechanism that requires private entities to purchase the crops at or above MSP, which will alleviate the fiscal burden on the government. The report also mentions the need for crop diversification along with promoting high-value, climate-resilient crops to make sure there is a more balanced agricultural output leading to enhancement in farmers’ income.

The second alternative that the SBI has recommended is the introduction of a livelihood credit card along with setting up a Comprehensive Credit Guarantee Fund Trust- Agri and Allied Sectors (CGFT-AAS) with a capital outlay of Rs 11,320 crore over five years which will act as a credit accelerator ensuring coverage of all fresh agricultural loans. The measures are intended to push rural demand and ensure credit flow which will help to address the financial needs of farmers.

The report also suggested that the government should directly support the farmers by paying them the difference between the selling price and MSP as it would not only provide price support to farmers but would also soften the fiscal cost of the government. The report focused on the need for proper focus on end-to-end activities such as farming, aggregating, grading, sorting, warehousing, and retailing to drive sustainable growth.