On May 29, 2025, the Union Cabinet, chaired by Prime Minister Narendra Modi, announced a significant hike in the Minimum Support Price (MSP) for common paddy, raising it by ₹69 per quintal to ₹2,369 for the 2025-26 kharif season. This marks a 2.98% increase from the previous year’s ₹2,300 per quintal. The government claims this new MSP ensures a 50% return over the cost of production, aiming to provide financial stability to farmers. However, this decision has already sparked debates about the methodology behind the cost calculation, the role of the Commission for Agricultural Costs and Prices (CACP), and the environmental consequences of incentivizing paddy cultivation, especially in water-stressed regions like Punjab.
MSP and Cost of Production: How Is It Calculated?
The MSP is a federally fixed floor price designed to protect farmers from distress sales by ensuring a minimum return on their produce. According to the announcement, the government adheres to the principle of setting MSP at least 1.5 times the cost of production, a commitment reiterated by Information and Broadcasting Minister Ashwini Vaishnaw. But how is this cost of production determined?
The CACP, tasked with recommending MSPs for 23 crops, calculates the cost of production using a comprehensive framework. It considers three main cost categories: A2, A2+FL, and C2.
A2 includes direct costs like seeds, fertilizers, pesticides, fuel, irrigation, and hired labor.
A2+FL adds the imputed value of family labor to A2.
C2, the most comprehensive, includes A2+FL plus the imputed rental value of owned land, interest on fixed capital, and a managerial cost (typically 10% of A2+FL).
The government’s claim of a 50% return over the cost of production is based on the A2+FL metric, which is less inclusive than C2. Critics argue that using A2+FL underestimates the true cost of farming, as it excludes critical expenses like land rent and capital interest, which are significant for small and marginal farmers. The C2 cost, which better reflects the farmer’s reality, would result in a higher MSP if used as the benchmark. For instance, if the A2+FL cost for paddy is ₹1,580 per quintal (leading to an MSP of ₹2,369 with a 50% margin), the C2 cost might be closer to ₹2,000 per quintal, necessitating a higher MSP of ₹3,000 for the same margin.
CACP’s Terms of Reference: A Consumer Bias?
The CACP’s Terms of Reference (TOR) have long been a point of contention. While the commission is mandated to ensure fair prices for farmers, its TOR also emphasizes controlling food inflation, maintaining price stability for consumers, and ensuring food security. This dual role often creates a conflict of interest. For example, a higher MSP could increase food prices, impacting consumers, which the CACP must balance against farmers’ income needs. Critics argue that this framework tilts in favor of consumers. The CACP often factors in market dynamics, global prices, and supply-demand scenarios, which can suppress MSP recommendations to keep food affordable. This consumer-centric approach has fueled farmer protests, with many demanding a legal guarantee for MSP based on the C2+50% formula, as recommended by the Swaminathan Committee in 2006.
Environmental Fallout: Punjab’s Paddy Problem
While the MSP hike aims to support farmers, it exacerbates an environmental crisis in Punjab, a state already grappling with the consequences of intensive paddy cultivation. Punjab, a major contributor to India’s rice production, grows approximately 180 lakh tonnes of paddy annually. Paddy is a water-intensive crop, with water requirements varying widely based on factors like rice type, irrigation methods, and climate. According to the Indian Council of Agricultural Research (ICAR), producing 1 kilogram of rice requires around 1,500 liters of water on average. However, other sources estimate a broader range of 800 to 5,000 liters, with an average of 2,500 liters. Taking a midpoint of these averages—2,000 liters per kilogram—Punjab’s annual paddy output consumes approximately 36 trillion liters of water (180 lakh tonnes = 18,000,000,000 kg × 2,000 liters/kg).
Punjab is not just cultivating paddy—it is harvesting a future without water. Each MSP-fueled acre pushes the state closer to becoming a man-made desert.
Punjab’s reliance on paddy, driven by assured MSP and procurement, has depleted its groundwater at an alarming rate. The state extracts around 166 billion cubic meters of groundwater annually, far exceeding its recharge rate of 149 billion cubic meters, based on pre-2025 data trends. This overexploitation has pushed Punjab to the brink of desertification, with soil degradation and falling water tables threatening long-term agricultural sustainability. The MSP hike, by further incentivizing paddy cultivation, is likely to increase the area under this crop, intensifying water stress. Already, over 80% of Punjab’s blocks are classified as overexploited or critical in terms of groundwater availability, a trend that could worsen with this policy.
A Path Forward: Balancing Farmer Welfare and Ecological Sustainability
Today’s MSP hike for paddy reflects the government’s intent to bolster farmer incomes, particularly for the nearly 800 million beneficiaries who receive free monthly food handouts under the public distribution system. However, it also underscores the need for a more nuanced approach. First, the government should reconsider the CACP’s cost calculation methodology, adopting the C2+50% formula to better reflect farmers’ expenses and ensure a fair return. Second, the CACP’s TOR needs reform to prioritize farmer welfare without compromising food security, possibly by integrating alternative mechanisms like direct income support to manage consumer price impacts.
On the environmental front, the government must incentivize crop diversification in Punjab. State should promote less water-intensive crops like Ragi, millets, pulses, or oilseeds through higher MSPs and assured procurement could reduce paddy dependency. Punjab’s farmers, who contribute 19% of India’s gross domestic product from agriculture, deserve policies that ensure both economic and ecological sustainability.
The MSP hike for paddy is a step toward farmer welfare, but it comes with significant trade-offs. Without addressing the flaws in cost calculations and the immense environmental cost of paddy cultivation, this policy risks deepening Punjab’s water crisis while leaving farmers’ long-term demands unmet. A balanced approach—one that supports farmers while safeguarding the land they depend on—is the need of the hour.