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MSP policy, bonuses, extent of procurement, and use of FCI rice by ethanol plants need rethink

By Ashok Gulati, Ritika Juneja & Purvi Thangaraj, respectively Distinguished Professor, Senior Fellow, and Consultant at ICRIER

India produced 154 million metric tonnes (MMT) of rice in 2025-26, surpassing China to become the world’s largest producer. India is also the top rice exporter, with 24.5 MMT in 2025 (USDA, 2026). This accounts for roughly 40% of the global rice trade (61.3 MMT), exceeding what the next four nations — Vietnam, Thailand, Pakistan, and Cambodia — export jointly. India also gives free food (rice/wheat, 5kg/person/month) to about 800 million people under the National Food Security Act (NFSA), of which almost two-thirds is rice.

Even after this, the Food Corporation of India (FCI) held rice stocks almost five times the buffer norm as of April 1. In 2024-25 (FY25), the carrying cost of this extra buffer stock was Rs 10,712 crore. To reduce these bulging stocks and cut down carrying costs, the government has decided to divert significant quantities of broken/damaged rice for ethanol production. In FY26, almost 5 MMT of rice have already been put into ethanol. The economic cost of rice for the FCI in FY27 is likely to be Rs 44/kg, and it is being given to ethanol plants at roughly Rs 23/kg, sparking concerns about the food vs fuel debate. Who is subsidising who?

How did India, a country that lived from “ship to mouth” in the mid-1960s, become the world’s largest rice producer, exporter, free distributor, and ethanol-maker? The success of the Green Revolution is only one part of the story. The other, more recent, and disturbing part is rice subsidies, which are wreaking havoc not only on the fisc but also on the environment — through higher greenhouse gas (GHG) emissions, soil degradation, groundwater contamination, and biodiversity loss.

Triad of Distorted Subsidies

Three interlocking rice policies seem responsible for this situation, with the first being open-ended procurement at minimum support price (MSP). Although the MSP for paddy is Rs 2,369/quintal (2025-26), states often outbid each other. Chhattisgarh pays about 40% above MSP, Telangana about 20%, while others such as Andhra Pradesh, Odisha, Punjab, and Haryana run their own variants of the same competitive largesse either through input subsidies or bonuses on top of MSP. The second is the free or near-free power across the rice belt.

Since rice is a flood-irrigated crop that demands up to 25 irrigations per season, free power is effectively a licence to mine groundwater without consequence. Third, urea is sold at a price that bears no relation to its cost. Its retail price has been frozen at Rs 242 per 45 kg (~$64/tonne) for years, with the government absorbing 85-90% percent of the economic cost. India’s own landed import price for urea had spiked to $935-$959/tonne in May 2026. Thanks to the Iran conflict somewhat subsiding, this has dropped to a little less than half.

Yet, this huge arbitrage drives the chronic over-application of urea on paddy fields as well as diversion to other industries and across borders. According to an ICRIER study, the combined subsidies (power, fertiliser, and canal water) for paddy cultivation in Punjab amounted to Rs 38,973/hectare in 2023-24 (Singh et al., 2025). These distorted and politically motivated policies, coupled with highly subsidised power and fertilisers, have resulted in overflowing rice stocks with the FCI. Rather than fixing the distorted incentive structure that created this mountain, the government has chosen a second exit valve — pouring it into ethanol distilleries.

The ethanol blending programme is not, in itself, a bad idea, at least up to 20% blending. However, mandating ethanol producers to source a fixed share of feedstock from the FCI rice is counterproductive. This resembles regressing to Soviet-era controls. Bureaucracy and politicians love controls as they benefit from rent-seeking, but the industry despises them. They want freedom to choose the most efficient feedstock — be it maize, sugarcane, or rice. But the government’s diktats don’t permit that. So, they make a deal — rice, with a cost of Rs 44/kg for the FCI, is sold to ethanol plants at `23/kg, saying it is broken and damaged.

Ecological Toll

Interestingly, the production of one kg of rice requires on an average about 4,000 litres of water for irrigation. Even if one assumes half of it percolates back to aquifers, the other half is absorbed partially by the plant, while the remaining evaporates. Since transplanted rice is the dominant practice in rice cultivation, it emits large amounts of methane, which is 25 times more potent than carbon dioxide. And when states like Punjab and Haryana use almost 250/kg of fertiliser per hectare, they emit almost 5 tonnes of carbon dioxide/ha as the plant absorbs not more than 35-40% of nitrogen. The rest goes into the environment as nitrous oxide, which is 273 times more potent than carbon dioxide, or leaches into groundwater, contaminating it with nitrate content. This in turn causes blue baby syndrome, thyroid, diabetes, and increases the risk of cancer.

This must change. Else, the boon of technology will become the bane of humanity. Wisdom lies in changing the course of MSP policy. Bonuses should be done away with, and procurement of any state should be limited to 40% of its production. Ethanol plants should also not be mandated to use rice from the FCI — maize is a much better option. Free supplies under PDS should be limited to only the most vulnerable — antyodaya (uplifting the weakest) — and the rest should be charged at least half the price of MSP. Direct seeded rice must be promoted to conserve water. Above all, the Centre should bite the bullet of fertiliser subsidy and move to income support for farmers and decontrolled fertiliser prices. Doing so would be a great service to India’s peasantry and the planet.

Source : financialexpress