Amid demands for a legal guarantee for minimum support price (MSP) for agricultural produce, a recent research report by the State Bank of India, suggests government devise alternative mechanisms to support farmers in the upcoming union budget.

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The report noted that government procurement of crops is limited to just about 6 per cent of the total produce, and there is a need for alternative mechanisms like agriculture markets and village haats to support the remaining 94 per cent of the agricultural output.

The report recommended that the government address the MSP issue in the upcoming budget by facilitating a direct consumer-farmer interface through the development of more mandis (agricultural markets) across the states. 

The establishment of these markets would allow farmers to sell their produce directly to consumers, thereby improving their income and market access.

The report also suggests that states should take the lead in this initiative by promoting urban haats (weekly village markets), which would further help farmers connect with consumers directly.Agriculture plays a crucial role in the Indian economy. 

The report noted that credit to agriculture and allied activities has increased significantly, from Rs 6 lakh crore in FY14 to Rs 20.7 lakh crore in FY24. 

Despite this growth, the MSP mechanism, while instrumental in price discovery, faces several challenges. 

These challenges include political interference, disincentivizing private investment, and neglect of non-MSP crops.

The report recommended that to create a more inclusive and sustainable framework for supporting Indian agriculture, policymakers should encourage crop diversification, promote high-value and climate-resilient crops, and enhance agricultural marketing infrastructure. 

Such measures would help address some of the shortcomings of the current MSP system and provide broader support to farmers.

On the contentious issue of farmers' demand for a legal guarantee of MSP on all crops, the report highlighted the potential fiscal burden this could place on the government.It stated, "If the government procures all crops under MSP, the total cost of procuring such crops in FY24 comes to around Rs 13.5 lakh crore.

"Furthermore, the report pointed out that a legal guarantee on MSP would neglect non-MSP crops such as fruits and vegetables and could disincentivize private investment in the agricultural sector. It could also reduce export competitiveness and increase trade disputes at the World Trade Organization (WTO).

As alternatives to legal guarantees of MSP, the report suggested several approaches. 

One option is to obligate private parties to buy crops at or above MSP. If the government were to procure the entire amount, storage would become an issue.

Another proposed solution is a price deficiency payment system, where the government directly compensates farmers for the difference between the selling price and MSP. 

This approach would reduce the fiscal cost for the government while still supporting farmers.

The report also provided data on government procurement over the past decade. It notes that while the MSP for all 22 crops has increased by an average of more than 100 per cent, the government primarily procures wheat and paddy through the Food Corporation of India (FCI) and state agencies.

Specifically, the government procures 92.8 per cent and 73.6 per cent of the paddy produced in Punjab and Haryana, respectively. 

For wheat, the government procures 72 per cent of the production from Punjab and 56.6 per cent from Haryana.

The report also addresses the issue of agricultural farm loan waivers, stating that such waivers distort the agricultural credit culture. 

It stated, "We firmly believe that the farm loan waivers essentially and ultimately serve a 'self-goal,' distorting credit culture." 

This suggests that while farm loan waivers may provide temporary relief to farmers, they undermine the long-term sustainability of agricultural financing.The report also highlighted the potential fiscal and economic challenges associated with a blanket legal guarantee of MSP and suggested more nuanced approaches to support farmers effectively.