The government must intervene in the market when prices of agricultural commodities fall below the minimum support price (MSP) by directly compensating the differential between market prices and MSP to the farmers, a SBI research report has stated.

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

The report noted that while MSP has been instrumental in the price discovery mechanism, benefitting 16 million farmers, the issues innate to MSP mechanism are many– needless politics, disincentivizing private investment, neglect of non-MSP crops, reduction in export competitiveness and burden of trade disputes.

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Alternately, the report has stated the government must look into factors such as obligation to private parties for buying crops at or above MSP, encouraging crop diversification, promoting high-value and climate-resilient crops to increase farmers’ income opportunities as also strengthening agricultural marketing infrastructure through increase in public investment in agri infrastructure.

Currently the Commission for Agricultural Costs and Prices (CACP) recommends MSP of 23 crops mostly for paddy, wheat, pulses, oilseeds, cotton, jute, sugarcane and copra twice annually.

“While the share of food grain in total agri and allied output is 17%, the share of food grains procured by the Government through MSP vide institutional mechanism works out to 6% of the total output, though it has entailed an expenditure of Rs 3.4 trillion in FY23,” SBI has stated.

The government agencies such as Food Corporation of India, farmers’ cooperative Nafed, Cotton Corporationof India and state government agencies procedures mainly wheat, rice, pulses and oilseeds. In contrast, segments such as livestock, vegetables, and fruits, representing a combined 71% of agricultural output, receive inadequate support.

The report also recommended introducing a livelihood credit card 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.