Long-run dynamics of minimum support price transmission to farm harvest prices in India: evidence using cointegration and VECM approach

Purpose The paper aims to generate evidence on the influence of minimum support price (MSP) on farm harvest prices (FHP) in the long-run and the speed of adjustment of farm gate prices to the changes in MSP. Design/methodology/approach This study examined the long-run equilibrium relationship between MSP and FHP using data from 1980-81 to 2022-23. Johansen cointegration technique and vector error correction model (VECM) for cointegrated variables were estimated to capture both the short-term dynamics and long-term adjustment process. Whereas, if no cointegration was found, a standard VAR model was used to analyze the short-term interactions between MSP and FHP. Findings The results reveal a significant long-run equilibrium relationship between MSP and FHP for most crops with varying levels of price responsiveness and adjustment patterns. From 1980 to 2000, FHP often exceeded MSP, reflecting robust market conditions where farmers benefited from market forces without relying heavily on MSP. Post-2000, FHP often fell below MSP for almost all selected crops, indicating the increasing failure of MSP to act as a reliable price floor. Research limitations/implications Variations in procurement of crop output at MSP across states may lead to differences in farmers’ price realization, which has not been fully explored. Originality/value These findings highlight the need for policy reforms to strengthen MSP implementation and expand its coverage via tailored decentralization of procurement. The insights provided are crucial for designing an inclusive and responsive crop price policy that fulfills its intended role in India’s agricultural economy.