Evaluating the Impact of Minimum Support Price (MSP) on Agricultural Productivity and Efficiency

The Minimum Support Price (MSP) mechanism is a policy tool used by governments, especially in the agricultural sector, to protect farmers from market price fluctuations and ensure they receive a minimum income for their produce. The MSP is the guaranteed minimum price at which the government agrees to purchase certain agricultural commodities from farmers.

Before the sowing season, the government announces the MSP for various crops such as wheat, sugarcane, cotton, and oilseeds. The MSP is determined based on factors like production costs, market trends, and demand-supply dynamics. It is generally set higher than the production cost to provide farmers with a reasonable profit margin. Government agencies, such as PASSCO and provincial governments, are responsible for procuring crops from farmers at the MSP. They establish procurement centers where farmers can sell their produce. The government sets specific specifications regarding the quantity and quality of crops eligible for MSP procurement. These specifications may include factors like moisture content, size, and weight to ensure that only high-quality produce is purchased. If the market price for a particular crop falls below the MSP, farmers have the option to sell their produce to the government at the guaranteed price. The price differential between the MSP and the market price is intended to compensate farmers for any losses incurred due to low market prices.

The Agriculture Policy Institute (API), formerly known as the Agriculture Prices Commission, was established in 1981 and reconstituted in 2006 under the Ministry of National Food Security & Research. It plays a crucial role in formulating and evaluating the MSP mechanism. The API conducts research, analyzes market trends, studies production costs, and recommends appropriate MSP levels for various crops. It actively engages with stakeholders such as farmers’ associations, agricultural commodity boards, government procurement agencies, and policymakers, organizing consultations and workshops to gather feedback and foster dialogue on MSP-related policies.

Before 2006, the API was responsible for formulating the MSP for 12 crops including minor and major crops. However, they later shifted their focus primarily to major crops for several reasons. Major crops such as wheat, rice, sugarcane, and cotton have a significant impact on food security and the overall agricultural economy, and thus received more attention and resources compared to minor crops. Limited resources, including financial, administrative, and logistical capacities, may have constrained the government’s ability to cover a wide range of minor crops under the MSP mechanism. Minor crops also face challenges in terms of smaller production volumes, limited market demand, and establishing efficient procurement and marketing systems. The lack of comprehensive data and research on minor crops further complicated the formulation of MSP policies. Additionally, the priorities and interests of stakeholders, including farmers and industry associations, may have influenced the emphasis on major crops within the MSP framework.

The MSP plays a crucial role in the agricultural sector for multiple reasons. Firstly, it offers income security to farmers by guaranteeing a minimum price for their produce, shielding them from financial hardships caused by market fluctuations. This stability encourages farmers to continue their agricultural activities confidently. Secondly, the MSP acts as a powerful incentive for farmers to increase production. With the assurance of a minimum price, farmers are motivated to invest in quality inputs, adopt modern techniques, and expand their cultivation areas, contributing to agricultural growth and food security. Additionally, the MSP allows the government to build buffer stocks, ensuring a steady supply of essential commodities during scarcity or emergencies. It also enables market intervention to prevent sudden price falls caused by oversupply, promoting fair prices for both farmers and consumers while maintaining market stability.

Critics argue that the MSP can distort market dynamics by creating an artificial price, leading to market inefficiencies. Government procurement operations under the MSP can reduce competition and discourage private buyers, hampering market efficiency and private investment in agriculture. Moreover, the MSP imposes a significant financial burden on the government, especially when market prices fall below the MSP, requiring the government to procure surplus produce, manage storage and distribution, and bear associated costs. This strain can negatively impact public finances and the overall fiscal health of the government.

In Pakistan, the MSP for wheat saw a significant increase in the year 2022-23. It rose by 100 percent, reaching Rs 3,900 per 40 kg in Punjab and Rs 4,000 in Sindh, compared to the previous year’s MSP of Rs 1,950 per 40 kg. The significant increase in the MSP was required due to the rising costs of fertilizers, pesticides, machinery rates, fuel and electricity, transportation charges, and labor expenses. These escalating expenses left farmers with no savings under the MSP. Some experts express concern that these high support prices may contribute to inflation and food insecurity among consumers in Pakistan.

Timely announcement of the MSP for crops can have a positive effect on crop production. When the MSP is announced before the cultivation season, farmers can make informed choices about whether to grow wheat or opt for other crops.

Azeem Hakro
Azeem Hakro
I have worked as a Deputy Food Commissioner in the Ministry of National Food Security and Research, Islamabad. In addition to being a Deputy Chief at the Agriculture Policy Institute, I also have experience in information technology.