Currently, Pakistan's MSP applies to only three crops — wheat, sugarcane, and cotton — unlike India's system, which covers 23 crops.
MSP is a common tool in many developing nations and serves two main purposes: it guarantees farmers a minimum price for their produce and stabilizes the supply and production of essential crops. The first function protects farmers from global price volatility and discourages distress sales during surplus periods, while the second protects consumers from supply-demand imbalances and market inefficiencies.
However, implementing this system is costly and requires strong institutional support, sufficient crop storage infrastructure, and significant financial resources.
Wheat, Pakistan’s largest crop cultivated on 9.6 million hectares, will be the most affected by the IMF’s mandate. The wheat MSP system itself is not flawed and has provided stability in most years. The main issue lies in the inefficiency of its implementation, which suffers from corruption and heavy reliance on borrowing from commercial banks at high-interest rates to fund wheat procurement and storage.
For instance, in previous years (except 2024), the Government of Punjab’s Food Department procured approximately 3.5-4.5 million tonnes of wheat annually — about 16-20% of the province’s total production — to maintain reserves and stabilize wheat flour prices. The procured wheat was sold to flour mills at prices equal to or higher than the MSP.
The crux of the issue is the very high incidental costs (storage, freight, interest on loans) and operational costs (salaries), coupled with wastage and pilferage, which push the total cost to the government 20-25% above the MSP.
Over time, the government borrowed heavily, making only partial repayments. As of June 2023, outstanding debt reached Rs680 billion, with annual interest payments of Rs87 billion in 2022-23 and Rs110 billion in 2023-24.
Other provinces face similar challenges. This has transformed the MSP system into a financial burden, leading the IMF to push for its discontinuation.
While the MSP for wheat is often seen as a subsidy for farmers, this view is somewhat misleading. A review of MSPs and global wheat prices over ten years (2014-2023) shows that farmers benefited from higher MSPs in 2015, 2016, 2017, 2018, and 2019 due to the PML-N government’s policy of capping the dollar exchange rate, which lowered food import costs.
However, during 2014, 2020, 2021, 2022, and 2023, farmers were paid less than global market prices, with the government even forcibly seizing wheat from farmers’ homes to meet procurement targets. Overall, farmers have seen little benefit from the wheat MSP system.
Cotton is another crop with federal government intervention through an intervention price, though not regularly. In 2023, the intervention price was set at Rs8,500 per 40kg as part of efforts to revive cotton production. When market prices dropped below this threshold, the government failed to provide support, leaving many farmers to sell cotton for Rs6,000-6,500 per 40kg.
Sugarcane is handled differently, with provincial governments setting minimum purchase prices annually through consultations with farmers and sugar mills, without financial obligations. There is concern that higher sugarcane prices benefit farmers but increase sugar production costs. However, for the 2023-24 season, the price difference between India (INR 315 per quintal or Pak Rs421 per 40kg) and Pakistan (Pak Rs425 per 40kg) was minimal, while Pakistan's production costs remain significantly higher.
The key challenge now is to anticipate the effects of phasing out MSPs and mitigate potential negative outcomes. Eliminating the MSP could harm agricultural productivity. In the absence of strong market regulation, farmers could be left vulnerable to cartels in the wheat, cotton, and sugar sectors, forcing them to switch crops. This year’s reduction in maize and cotton acreage, driven by low 2023 prices, is an example of this.
Such changes could exacerbate the already high crop instability index — the variation in acreage, yields, and prices over time — driven by climate change and increasing input costs. However, increasing crop yields, which would improve production, lower per-unit costs, and reduce prices, could help offset the negative impacts of removing the MSP system.
Khalid Wattoo is a farmer and development professional, and Dr. Waqar Ahmad is a former Associate Professor at the University of Agriculture, Faisalabad.
