Agricultural prices in India are crucial for over 126 million small and medium cultivators who predominantly produce wheat and rice. Since the farmer protests of 2021, government intervention in agricultural markets has been fiercely debated on ideological grounds. On the one hand, some economists have argued that price setting through the MSP restricts private firms from entering the grain market and keeps farm incomes depressed. On the other hand, farmers insist that the MSP, when coupled with actual procurement, provides them with a price floor that enables them to negotiate better prices with private traders and large corporations and thereby earn higher farm income.

In a recent study, we investigated the effect of the MSP on agricultural prices and farm incomes. Using data on farm incomes and agricultural wages during the 2000-2012 period, we show that public procurement at the MSP leads to rapid improvement in farm incomes and agricultural wages in states such as Haryana and Madhya Pradesh, where state-level APMC reforms have diluted the monopoly of the mandis and allowed farmers to sell directly to private buyers. However, in states such as Bihar, Karnataka, and Gujarat, where agricultural markets were liberalised without any procurement, farm incomes and agricultural wages grew modestly.

These findings suggest that the guarantee of public procurement at MSP helps farmers in two ways. First, some farmers benefit due to selling directly at MSP. Second, and more importantly, even when farmers don’t sell to the government, their incomes can rise because grain prices rise in these districts due to increased demand created by government procurement. This is particularly true for paddy, which is produced in many states.

Contrary to the formulation of MSP as a price ceiling, data published by the department of agriculture and farmers welfare suggests that between 2017 and 2021, the farm harvest prices for paddy exceeded MSP in several states such as Haryana and Chhattisgarh where roughly 70% of the paddy output was procured by the Union and state governments.

While our research shows that the guarantee of MSP can exert upward pressure on agricultural prices and farm incomes, the real issue is that of making this guarantee binding. Recent articles have compared the fiscal impacts of proposed MSP legalisation with that of the National Rural Employment Guarantee Act (NREGA) of 2005. Indeed, the experience of NREGA can be extremely relevant in informing the debate around a legalised MSP.

In states where NREGA is properly implemented, it has been highly successful in raising wages and addressing socio-economic disparities. However, the guarantee of 100 days of employment was never realised and there is substantial unmet demand for NREGA jobs in most districts. The national average for NREGA workdays for a household was 50 days in 2021-22 and significant variation exists in the provision of NREGA at the state level. While states like Rajasthan, Kerala and Andhra Pradesh have consistently performed better than the national average, others such as Assam, Uttar Pradesh and Bihar have struggled to provide more than 30 days of NREGA employment to rural households in a year.

Therefore, like the guarantee of NREGA employment, the legalisation of MSP may also become a promise half-heartedly implemented by a government reluctant to address the farm crisis. The fact that MSP is announced for 23 crops but procurement is confined primarily to wheat and rice from a few districts in selected states, suggests that successive governments have avoided actual procurement at MSP, especially in non-election years.

According to the 2015 Agricultural Census, more than 86% of Indian farmers own less than two hectares of land. These small and marginal cultivators face two major challenges. On the one hand, crop production decisions are impacted by volatility in global and domestic prices, coupled with greater uncertainty caused by changing cropping patterns. On the other hand, farm incomes have been squeezed by rising labour costs during the last decade.

Some commentators have suggested that income support programmes such as Rythu Bandhu in Telangana and KALIA in Odisha be used as non-market distorting policies to help farmers. While these schemes are effective in raising the household incomes of farmers, they exclude the most marginalised sections of the agrarian economy such as tenant farmers and landless agricultural workers. Income support alone cannot be sufficient to address the agrarian crisis. The government must intervene directly when the market price falls below MSP. However, the credibility and timeliness of such intervention remain suspect.

The cost of government intervention in agricultural markets has also become an ideological question. For example, some economists have assumed that farmers will sell (almost exclusively) to the government and correspondingly, the total agricultural output multiplied by MSP would be the fiscal cost of the legalised MSP. Others have adopted a more dynamic model of agricultural markets to argue that the government will not buy all the produce but simply enough to keep prices above the MSP level. In fact, the actual amount of government procurement would depend on how successful it is in generating expectations of actual procurement that is enough to raise prices by allowing farmers to negotiate better with private buyers.

Kartik Misra teaches in the department of economics, Sewanee: The University of the South, Tennessee, and Deepankar Basu teaches in the department of economics, University of Massachusetts, Amherst. The views expressed are personal