Does a farmer's knowledge of minimum support price (MSP) affect the farm-gate price? Evidence from India

Abstract

Purpose – This paper examines whether farmers' knowledge of the minimum support prices (MSPs) affects farm-gate prices. MSP is the minimum guaranteed price for agricultural commodities announced by the Government of India for 24 commodities. Most farmers in India prefer to sell their produce at the farm-gate due to a small marketable surplus and hence do not directly benefit from MSP. The authors test the common argument in the political discourse that if farmers have knowledge of MSP, then they can bargain with traders during the farm-gate transaction and demand a better price close to MSP. Design/methodology/approach – The authors use matching methods to examine the impact of knowledge of MSP on farm-gate prices. Findings – Using nationally representative data, the authors show that there is no empirical evidence that the knowledge of MSP of the crops leads to higher bargaining power and better farm-gate prices. Practical implications – Price information (MSP in this case) alone cannot improve the bargaining power of farmers and result in a better price realization. As a safety net, MSP fails in the absence of procurement of products by the government. This also raises the question of the equitability of the price support system in India and calls for a rethink of the MSP policy. Originality/value – This study is the first of its kind to examine the anchoring effect of knowledge of MSP on farm-gate prices using a nationally representative dataset.

Keywords

• Minimum support prices
• Bargaining
• Information asymmetry
• On-farm negotiations