Minimum Support Price (MSP) is the assured price at which foodgrains are procured from farmers by the central and state governments and their agencies, for the central pool of foodgrains. The central pool is used for providing foodgrains under the Public Distribution System (PDS) and other welfare schemes, and also kept as reserve in the form of buffer stock. However, in the past few months, there have been demands to extend MSP to private trade as well and guarantee MSP to farmers on all kinds of trade. This blogpost looks at the state of public procurement of foodgrains in India and the provision of MSP.
Is MSP applicable for all crops?
The central government notifies MSP for 23 crops every year before the Kharif and Rabi seasons based on the recommendations of the Commission for Agricultural Costs and Prices, an attached office of the Ministry of Agriculture and Farmers’ Welfare. These crops include foodgrains such as cereals, coarse grains, and pulses. However, public procurement is largely limited to a few foodgrains such as paddy (rice), wheat, and, to a limited extent, pulses (Figure 1).
Figure 1: Percentage of crop production that was procured at MSP in 2019-20
Sources: Unstarred Question No. 331, Lok Sabha, September 15, 2020; PRS.
Since rice and wheat are the primary foodgrains distributed under PDS and stored for food security, their procurement level is considerably high. However, the National Food Security Act, 2013 requires the central and state governments to progressively undertake necessary reforms in PDS. One of the reforms requires them to diversify the commodities distributed under PDS over a period of time.
How does procurement vary across states?
The procurement of foodgrains is largely concentrated in a few states. Three states (Madhya Pradesh, Punjab, and Haryana) producing 46% of the wheat in the country account for 85% of its procurement (Figure 2). For rice, six states (Punjab, Telangana, Andhra Pradesh, Chhattisgarh, Odisha, and Haryana) with 40% of the production have 74% share in procurement (Figure 3). The National Food Security Act, 2013 requires the central, state, and local governments to strive to progressively realise certain objectives for advancing food and nutritional security. One of these objectives involves geographical diversification of the procurement operations.
Figure 2: 85% wheat procurement is from three states (2019-20)
Sources: Department of Food and Public Distribution; PRS.
Figure 3: 76% of the rice procured comes from six states (2019-20)
Sources: Department of Food and Public Distribution; PRS.
Is MSP mandatory for private trade as well in some states?
MSP is not mandatory for purchase of foodgrains by private traders or companies. It acts as a reference price at which the government and its agencies procure certain foodgrains from farmers.
In September 2020, the central government enacted a new farm law which allows anyone with a PAN card to buy farmers’ produce in the ‘trade area’ outside the markets notified or run by the state Agricultural Produce Marketing Committees (APMCs). Buyers do not need to get a license from the state government or APMC, or pay any tax to them for such purchase in the ‘trade area’. These changes in regulations raised concerns regarding the kind of protections available to farmers in the ‘trade area’ outside APMC markets, particularly in terms of the price discovery and payment. In October 2020, Punjab passed a Bill in response to the central farm law to prohibit purchase of paddy and wheat below MSP. Any person or company compelling or pressurising farmers to sell below MSP will be punished with a minimum of three-year imprisonment and a fine. Note that 72% of the wheat and 92% of the rice produced in Punjab was purchased under public procurement in 2019-20.
Similarly, in November 2020, Rajasthan passed a Bill to declare those contract farming agreements as invalid where the purchase is done below MSP. Any person or company compelling or pressurising farmers to enter into such an invalid contract will be punished with 3 to 7 years of imprisonment, or a fine of minimum five lakh rupees, or both. Both these Bills have not been enacted yet as they are awaiting the Governors’ assent.
How has MSP affected the cropping pattern?
According to the central government’s procurement policy, the objective of public procurement is to ensure that farmers get remunerative prices for their produce and do not have to resort to distress sale. If farmers get a better price in comparison to MSP, they are free to sell their produce in the open market. The Economic Survey 2019-20 observed that the regular increase in MSP is seen by farmers as a signal to opt for crops which have an assured procurement system (for example, rice and wheat). The Economic Survey also noted that this indicates market prices do not offer remunerative options for farmers, and MSP has, in effect, become the maximum price that the farmers are able to realise.
Thus, MSP incentivises farmers to grow crops which are procured by the government. As wheat and rice are major food grains provided under the PDS, the focus of procurement is on these crops. This skews the production of crops in favour of wheat and paddy (particularly in states where procurement levels are high), and does not offer an incentive for farmers to produce other items such as pulses. Further, this puts pressure on the water table as these crops are water-intensive crops.
To encourage crop diversification and thereby reduce the consumption of water, some state governments are taking measures to incentivise farmers to shift away from paddy and wheat. For example, Haryana has launched a scheme in 2020 to provide Rs 7,000 per acre to those farmers who will use more than 50% of their paddy area (as per the area sown in 2019-20) for other crops. The farmers can grow maize, bajra, pulses, or cotton in such diversified area. Further, the crop produce grown in such diversified area under the scheme will be procured by the state government at MSP.
Last week, the Power Finance Corporation reported that state-owned power distribution companies across the country made financial losses amounting to Rs 68,832 crore in 2022-23. This is four times higher than the losses witnessed in 2021-22, and roughly equivalent to the annual budget of a state like Uttarakhand. This blog examines some of the causes and implications of such losses.
Overview of financial losses
For several years now, electricity distribution companies (discoms), which are mostly state-owned, have witnessed steep financial losses. Between 2017-18 and 2022-23, losses accumulated to over three lakh crore rupees. In 2021-22, discom witnessed substantial reduction in their losses, primarily because states released 1.54 lakh rupees in subsidies to clear pending dues. State governments provide discoms with subsidies, so that domestic and agricultural consumers receive affordable power. These payments are typically delayed which creates cash flow constraints, and leads to an accumulation of debt. In addition, costs incurred by discoms in 2021-22 remained unchanged.
Note: Data from 2020-21 onwards does not include Odisha, and Dadra & Nagar Haveli and Daman and Diu since their distribution function was privatised in 2020-21. Data for Ladakh is available from 2021-22 onwards. Data for Jammu and Kashmir is not available. The Delhi Municipal Council Distribution Utility has been included from 2020-21 onwards.
Sources: Power Finance Corporation reports for various years; PRS.
As of 2022-23, losses have increased again to reach Rs 68,832 crore. This increase has been driven by rising costs. At a per unit level, the cost of supplying one kilowatt of electricity rose from 7.6 rupees in 2021-22, to 8.6 rupees in 2022-23 (See Table 1).
Table 1: Financial details of state-owned power distribution companies
Details |
2019-20 |
2020-21 |
2021-22 |
2022-23 |
Average cost of supplying power (ACS) |
7.4 |
7.7 |
7.6 |
8.6 |
Average revenue realised (ARR) |
6.8 |
7.1 |
7.3 |
7.8 |
Per unit loss (ACS-ARR) |
0.6 |
0.6 |
0.3 |
0.7 |
Total losses (in Rs crore) |
-60,231 |
-76,899 |
-16,579 |
-68,832 |
Note: Data from 2020-21 onwards does not include Odisha, and Dadra & Nagar Haveli and Daman and Diu since their distribution function was privatised in 2020-21. Data for Ladakh is available from 2021-22 onwards. Data for Jammu and Kashmir is not available. The Delhi Municipal Council Distribution Utility has been included from 2020-21 onwards.
Sources: Power Finance Corporation reports for various years; PRS.
Purchase of electricity from generation companies (gencos) forms about 70% of a discom’s total costs, and coal is the primary source for generating electricity. The following chain of events took place in 2022-23: (i) consumer demand for electricity rose by 10% over the previous year, as compared to a 6% year-on-year increase in the past 10 years, (ii) coal had to be imported to meet the increased demand, and (iii) global coal prices were elevated.
Coal imported at elevated prices to keep up with rising electricity demand
In 2022-23, demand for electricity increased by 10% over 2021-22. Between 2008-09 and 2018-19, demand increased at an annual growth rate (CAGR) of 6%. Electricity demand grew as the economy grew (at 7%), and largely came from domestic and agricultural consumers. These consumer categories account for 54% of the total electricity sales, and their demand rose by 7%.
Sources: Central Electricity Regulatory Commission; PRS.
Electricity cannot be stored at scale, which means that generation must be scheduled depending on anticipated demand. The Central Electricity Authority anticipates annual demand for each year. It estimated that demand in 2022-23 would be at 1,505 billion units. However, the actual demand was higher than anticipated in the first few months of 2022-23 (See Figure 3).
To meet this demand, electricity generation had to be ramped up. Coal stocks had already depleted from 29 million tonnes in June 2021 to eight million tonnes in September 2021, on account of high demand in 2021-22. To ensure uninterrupted supply of power, the Ministry of Power directed gencos to import coal. The Ministry noted that without imports, widespread power cuts and blackouts would have occurred.
Sources: Load Generation Balance Report 2022 and 2023, Central Electricity Authority; PRS.
Coal imports rose by about 27 million tonnes in 2022-23. While this constituted only 5% of the overall coal used in the sector, the price at which it was imported significantly impacted the sector. In 2021-22, India imported coal at an average price of Rs 8,300 per tonne. This rose to Rs 12,500 per tonne in 2022-23, a 51% increase. Coal was primarily imported from Indonesia, and prices shot up due to the Russia-Ukraine war, and demand surge by countries like India and China.
Sources: Ministry of Power; Ministry of Statistics and Programme Implementation; PRS.
Coal import situation going forward
In January 2023, the Ministry of Power advised gencos to import 6% of the required coal, to ensure sufficient stock until September 2023. It noted that due to floods and variable rainfall in various parts of the country, hydro generation capacity reduced by about 14%. This put additional burden on coal based thermal generation in 2023-24. Following this, in October 2023, the Ministry directed all gencos to continue using at least 6% imported coal until March 2024.
Sources: Ministry of Coal; PRS.
Structural issues in the power sector and its impact on state finances
Discoms witness persistent financial losses due to certain structural issues. Their costs are typically high because of old contracts with generation companies (gencos). Power purchase costs in these contracts do not account for production efficiencies over the years, and costs remain unchanged. Tariffs are only revised every few years, to ensure that consumers are protected from supply chain shocks. As a result, costs are carried forward for a few years. In addition, discoms sell electricity to certain consumers such as agricultural and residential consumers, below cost. This is supposed to primarily be recovered through subsidy grants provided by state governments. However, states often delay subsidy payments leading to cash flow issues, and accumulation of debt. In addition, tariff recovery from the power sold is not optimal.
Losses reported in the generation sector have also increased. In 2022-23, state-owned gencos reported losses worth Rs 7,175 crore, as compared to the Rs 4,245 crore in 2021-22. Rajasthan accounted for 87% of these, at Rs 6,278 crore. Note that under the Late Payment Surcharge Rules, 2022, discoms are required to make upfront payments to gencos.
Risk to state finances
Persistent financial losses, high debt and guarantees extended by states continue to pose a risk to state finances. These are contingent liabilities for state governments, i.e., in the event a discom is unable to repay its debt, the state would have to take it over.
Several such schemes have been introduced in the past to bail discoms out (See Table 2). As of 2022-23, discoms have an outstanding debt worth Rs 6.61 lakh crore, 2.4% of the national GDP. Debt is significantly high in states such as Tamil Nadu (6% of GSDP), Rajasthan (6% of GSDP), and Uttar Pradesh (3% of GSDP). Previous Finance Commissions have recognised that strengthening discom finances is key in minimising the risk to state finances.
Table 2: Key government schemes for the turnaround of the distribution sector over the years
Year |
Scheme |
Details |
2002 |
Bailout Package |
States take over the debt of state electricity boards worth Rs 35,000 crore, 50% waiver of interest payable by state electricity boards to central PSUs |
2012 |
Financial Restructuring Package |
States take over 50% of the outstanding short-term liabilities worth Rs 56,908 crore |
2015 |
Ujwal Discom Assurance Yojana (UDAY) |
States take over 75% of the debt of discoms worth Rs 2.3 lakh crore and also provide grants for any future losses |
2020 |
Liquidity Infusion Scheme |
Discoms get loans worth Rs 1.35 lakh crore from Power Finance Corporation and REC Limited to settle outstanding dues of generators, state governments provide guarantee |
2022 |
Revamped Distribution Sector Scheme |
Central government to provide result-linked financial assistance worth Rs 97,631 crore for strengthening of supply infrastructure |
Sources: NITI Aayog, Press Releases of the Ministry of Power; PRS.
For more details on the impact of discom finances on state finances, see here. For more details on structural issues in the power distribution sector, see here.
ANNEXURE
Table 3: Cost and revenue structure of discoms on energy sold basis (in Rs per kw)
Details |
2019-20 |
2020-21 |
2021-22 |
2022-23 |
Average cost of supplying power (ACS) |
7.4 |
7.7 |
7.6 |
8.6 |
of which |
||||
Cost of procuring power |
5.8 |
5.9 |
5.8 |
6.6 |
Average revenue realised (ARR) |
6.8 |
7.1 |
7.3 |
7.8 |
of which |
||||
Revenue from sale of power |
5.0 |
4.9 |
5.1 |
5.5 |
Tariff subsidy |
1.3 |
1.4 |
1.4 |
1.5 |
Regulatory income and revenue grant under UDAY |
0.3 |
0.1 |
0.0 |
0.2 |
Per unit loss |
0.6 |
0.6 |
0.3 |
0.7 |
Total financial losses |
-60,231 |
-76,899 |
-16,579 |
-68,832 |
Sources: Power Finance Corporation reports for various years; PRS.
Table 4: State-wise profit/loss of power distribution companies (in Rs crore)
State/UT |
2017-18 |
2018-19 |
2019-20 |
2020-21 |
2021-22 |
2022-23 |
Andaman and Nicobar Islands |
-605 |
-645 |
-678 |
-757 |
-86 |
-76 |
Andhra Pradesh |
-546 |
-16,831 |
1,103 |
-6,894 |
-2,595 |
1,211 |
Arunachal Pradesh |
-429 |
-420 |
NA |
NA |
NA |
NA |
Assam |
-259 |
311 |
1,141 |
-107 |
357 |
-800 |
Bihar |
-1,872 |
-1,845 |
-2,913 |
-2,966 |
-2,546 |
-10 |
Chandigarh |
321 |
131 |
59 |
79 |
-101 |
NA |
Chhattisgarh |
-739 |
-814 |
-571 |
-713 |
-807 |
-1,015 |
Dadra & Nagar Haveli and Daman & Diu |
312 |
-149 |
-125 |
NA |
NA |
NA |
Delhi |
NA |
NA |
NA |
98 |
57 |
-141 |
Goa |
26 |
-121 |
-276 |
78 |
117 |
69 |
Gujarat |
426 |
184 |
314 |
429 |
371 |
147 |
Haryana |
412 |
281 |
331 |
637 |
849 |
975 |
Himachal Pradesh |
-44 |
132 |
43 |
-153 |
-141 |
-1,340 |
Jharkhand |
-212 |
-730 |
-1,111 |
-2,556 |
-1,721 |
-3,545 |
Karnataka |
-2,439 |
-4,889 |
-2,501 |
-5,382 |
4,719 |
-2,414 |
Kerala |
-784 |
-135 |
-270 |
-483 |
98 |
-1,022 |
Ladakh |
NA |
NA |
NA |
NA |
-11 |
-57 |
Lakshadweep |
-98 |
-120 |
-115 |
-117 |
NA |
NA |
Madhya Pradesh |
-5,802 |
-9,713 |
-5,034 |
-9,884 |
-2,354 |
1,842 |
Maharashtra |
-3,927 |
2,549 |
-5,011 |
-7,129 |
-1,147 |
-19,846 |
Manipur |
-8 |
-42 |
-15 |
-15 |
-22 |
-146 |
Meghalaya |
-287 |
-202 |
-443 |
-101 |
-157 |
-193 |
Mizoram |
87 |
-260 |
-291 |
-115 |
-59 |
-158 |
Nagaland |
-62 |
-94 |
-477 |
-17 |
24 |
33 |
Puducherry |
5 |
-39 |
-306 |
-23 |
84 |
-131 |
Punjab |
-2,760 |
363 |
-975 |
49 |
1,680 |
-1,375 |
Rajasthan |
-11,314 |
-12,524 |
-12,277 |
-5,994 |
2,374 |
-2,024 |
Sikkim |
-29 |
-3 |
-179 |
-34 |
NA |
71 |
Tamil Nadu |
-12,541 |
-17,186 |
-16,528 |
-13,066 |
-9,130 |
-9,192 |
Telangana |
-6,697 |
-9,525 |
-6,966 |
-6,686 |
-831 |
-11,103 |
Tripura |
28 |
38 |
-104 |
-4 |
-127 |
-193 |
Uttar Pradesh |
-5,269 |
-5,902 |
-3,866 |
-10,660 |
-6,498 |
-15,512 |
Uttarakhand |
-229 |
-808 |
-323 |
-152 |
-21 |
-1,224 |
West Bengal |
-871 |
-1,171 |
-1,867 |
-4,261 |
1,045 |
-1,663 |
State Sector |
-56,206 |
-80,179 |
-60,231 |
-76,899 |
-16,579 |
-68,832 |
Dadra & Nagar Haveli and Daman & Diu |
NA |
NA |
NA |
242 |
148 |
104 |
Delhi |
109 |
657 |
-975 |
1,876 |
521 |
-76 |
Gujarat |
574 |
307 |
612 |
655 |
522 |
627 |
Odisha |
NA |
NA |
-842 |
-853 |
940 |
746 |
Maharashtra |
NA |
590 |
1,696 |
-375 |
360 |
42 |
Uttar Pradesh |
182 |
126 |
172 |
333 |
256 |
212 |
West Bengal |
658 |
377 |
379 |
398 |
66 |
-12 |
Private Sector |
1,523 |
2,057 |
1,042 |
2,276 |
2,813 |
1,643 |
All-India |
-54,683 |
-78,122 |
-59,189 |
-77,896 |
-13,766 |
-67,189 |
Note: Minus sign (-) indicates loss; Dadra & Nagar Haveli and Daman & Diu discom was privatised on April 1, 2022; New Delhi Municipal Council Distribution utility has been added from 2020-21 onwards.
Sources: Power Finance Corporation reports for various years; PRS.