Budget 2024: Fix or nix MSP? SBI report calls for overhaul amid rising costs and shrinking farmer base

Budget 2024: As India prepares for the Union Budget 2024-25, a research report by the State Bank of India (SBI) has highlighted the need to revamp the agricultural sector's Minimum Support Price (MSP) mechanism. 

The report identifies key shortcomings of the MSP system, including its tendency to disincentivize private investment, narrow focus on specific crops, and negative impact on export competitiveness.

What does the SBI report recommend?

The MSP is intended to ensure farmers receive a minimum price for their crops, protecting them from market volatility. However, the SBI report, released on July 8, revealed that while MSP benefits around 1.6 crore farmers, it also creates economic distortions. “The mechanism disincentivized private investment, focused on a narrow range of crops, and hindered export competitiveness, leading to costly trade disputes. The fiscal impact is substantial, with MSP-related expenditures reaching ₹3.4 lakh crore in FY23.”

Currently, the government procures mainly wheat and rice, which constitute only 6 per cent of the total agricultural output. In contrast, significant segments such as livestock, vegetables, and fruits, representing a combined 71 per cent of agricultural output, receive inadequate support. Livestock alone accounts for 30.7 per cent of the agricultural output but falls outside the MSP's protective scope.

The SBI report suggests several innovative alternatives to address these issues. One proposal is to require private entities to purchase crops at or above MSP, thus alleviating the fiscal burden on the government. Additionally, encouraging crop diversification and promoting high-value, climate-resilient crops could enhance farmers' income and ensure a more balanced agricultural output.

The report also recommended introducing a Livelihood Credit Card (LCC) and establishing a comprehensive Credit Guarantee Fund for agri and allied Sectors. These measures aim to boost rural demand and streamline credit flow, more effectively addressing the financial needs of small and marginal farmers.

A holistic approach to agricultural value chain financing is crucial. This included increased public investment in agricultural infrastructure and developing robust marketing frameworks. The agricultural sector can unlock significant value and drive sustainable growth by focusing on end-to-end activities—farming, aggregating, grading, sorting, warehousing, and retailing. The report emphasizes the need for a comprehensive Credit Guarantee Fund Trust for Agriculture and Allied Sectors (CGFT-AAS) with a capital outlay of around ₹11,320 crore over five years​​.