MSP Crops Are No Longer The Mainstay Of Agri Sector, And That Merits A Dynamic Policy Response

The composition of the agriculture sector is changing dramatically. Analysing this change and responding with the appropriate policy frameworks will enable the sector to grow faster and will improve the livelihoods of the millions of farmers across the nation.

Crops NO Longer Agriculture’s Mainstay

The Gross Value Output (GVO) of agriculture sub-sectors in India is shown in Table 1 from FY 12 to FY 19 (latest available). The GVO of the agriculture sector nearly doubled from Rs 19 lakh crore in FY 12 to Rs 37.2 lakh crore in FY 19—at a compound annual growth rate (CAGR) of 10 per cent, as shown in Table 1. There is, however, wide variation in the growth of the various sub-sectors. While crops grew from Rs 8.1 lakh crore to Rs 12.5 lakh crore in the same period, at a CAGR of 6.3 per cent, other sub-sectors are growing faster.

A study of the GVO and growth rates of various agriculture sub-sectors reveals the following:

1. The share of crops in the composition of the agriculture sector is steadily decreasing. In FY 12, crop GVO was Rs 8.2 lakh crore which amounted to 43 per cent of the agri sector GVO. This has decreased by 10 percentage points to 33.8 per cent in FY 19.

2. Crops also have the lowest CAGR among the major groups—at 6.3 per cent, compared to 11.2 per cent for fruits and vegetables, 13 per cent for condiments and spices, 13 per cent for livestock and 17.6 per cent for fishing and aquaculture.

3. If these differential growth rates continue, the share of crops is estimated to decrease to 27.5 per cent of the agriculture sector by FY 25.

4. The livestock sub-sector in FY 19 is almost as large as crops at Rs 11.5 lakh crore, while growing twice as fast as crops at 13 per cent. At this rate, livestock GVO may grow to Rs 23.9 lakh crore in FY 25—larger than crops.

5. The fruits and vegetables segment is fairly large, which was Rs 6 lakh crore in FY 19, and is growing rapidly at 11 per cent CAGR. It is estimated to cross Rs 11 lakh crore GVO in FY 25.

6. Fishing and aquaculture is growing most rapidly at 17.6 per cent and is estimated to quickly cross INR 6 lakh crore by FY 25.

These trends signify a shift in the food habits of Indians, and also indicate that a larger share of farmer income is coming from non-crop sub-sectors. These non-crop sub-sectors are growing rapidly, constituted 66.2 per cent of the sector in FY 19, and do not have a Minimum Support Price (MSP). Farmers in these segments, reportedly, only accrue 30 per cent-35 per cent of the final price. The scope for policy measures to increase farmer incomes by facilitating market linkages here is tremendous.

The GVO of various crop segments in India is shown in Table 2 from FY 12 to FY 19. Cereals, growing at 8.2 per cent, is the largest segment with Rs 5.86 lakh crore GVO in FY 19 and consists of nearly half of the entire crop group shown with a GVO of Rs 12.6 lakh crore. Most of these crop segments, cereals included, have a Minimum Support Price (MSP) guaranteeing a minimum income for the farmer and protecting their interests—farmers reportedly accrue 80 per cent-85 per cent of the total price due to the MSP program which is marked close to the final market price.

Clearly crops are gradually becoming a smaller segment of the agriculture sector. In India, while the total agriculture sector GVO grew at a 7-year CAGR of 10 per cent, crops grew by 6.3 per cent and non-crop sectors grew at a combined CAGR of 12.4 per cent—double that of crops, as seen in Table 3. This dramatic change requires a comprehensive policy response that allows the agriculture sector to grow without being tethered to just crops.

Policy Response

1. More investment and focus are required on horticulture and livestock.

2. Market linkages must improve to increase the farmers’ share of ultimate price.

3. Facilitating better linkages between the farmers and other agricultural producers with the markets through Agri-tech startups will enable the fast-growing segments to rapidly increase incomes and value-add. These platforms encompass real-time market intelligence, price forecasting, post-harvest intervention and storage capabilities, D2C offerings, and competitive financing and insurance. Their use has resulted in 20 per cent-25 per cent more income for farmers, instant payment via COD and UPI, low wastage, and other significant benefits.

4. A study of the agriculture sectors in various states is required to find out how the composition differs. A state-specific strategy must be executed to improve the livelihoods of the farmers in each state. For example, the number of farmers growing crops in Punjab is quite high. On the other hand, in Karnataka, the share of crops in the agriculture GVO is 34 per cent.

5. India needs an export-oriented strategy. To put this in context, in 2021, the world economy was $94.8 trillion whereas India was $2.95 trillion. By orienting our agriculture sector towards exports, farmers will have the opportunity to capture the world market—leading to a significant 32x expansion opportunity, compared to the domestic economy of $3 trillion.

Agricultural exports from India today are around $50 billion. India must create a brand for fruits, vegetables and other products in global markets and create the necessary supply chains. This requires backend investment to train farmers in aggregation, grading, sorting, packaging, creating the required trust mark, and finally linking the products to the export market. These linkages include certification agencies to ensure organic produce which obtains a higher price globally is accepted and trusted by overseas consumer markets. India needs a comprehensive Agriculture Export Strategy that accounts for all these factors.

The overwhelming focus on MSP today, and especially rice and wheat which was less than 16 per cent of agriculture GVO in FY 19 and possibly lesser today, takes away from farmers the ability to grab the multiple opportunities available for rapid growth. As seen above, other agricultural segments are growing much faster. By mounting an appropriate policy response, India can pave the way for unprecedented growth in the sector, and enable our farming citizens to earn incomes closer to the national average, and pursue their own differentiated strategies to maximise value.

This piece first appeared in the 'The Financial Express'.