Minimum Support Price (MSP)

Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices. The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).

• At present, the Central Government sets MSP for 23 crops.
• These include:
  • 7 cereals (bajra, wheat, maize, paddy barley, ragi and jowar);
  • 5 pulses (tur, chana, masur, urad and moong);
  • 7 oilseeds (safflower, mustard, niger seed, soyabean, groundnut, sesame and sunflower);
  • 4 commercial crops (raw jute, cotton, copra and sugarcane).

MSP is price fixed by Government of India to protect the producer - farmers - against excessive fall in price during bumper production years. The minimum support prices are a guarantee price for their produce from the Government.

The major objectives are to support the farmers from distress sales and to procure food grains for public distribution. In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price.

Importance of Minimum Support Price:

1. Fixed Remunerations: The farmers are financially secured against the vagaries of price instability in the market. It provides security to farmers from the risk of crop failure and less production.
2. Informed decision making: MSP are announced at the beginning of the sowing season, this helps farmers make informed decisions on the crops they must plant. This advance information helps the farmer to make an informed decision about which crop to sow for maximum economic benefit within the limitations of his farm size, climate and irrigation facilities.
3. Diversification of crops: The MSP announced by the Government of India for the first time in 1966-67 for wheat has been extended to around 24 crops at the present. This has encouraged the farmers to grow these diverse crops to maximise their income.
4. Benchmark for private buyers: MSP sends a price-signal to market that if merchants don’t offer higher than MSP prices the farmer may not sell them his produce. Thus it acts as an anchor or benchmark for the agro-commodity It ensures the market prices will not be drastically lower than MSP.
5. Targeted crops: MSP is used as a tool to incentivize production of specific food crops which is short in supply. MSP motivates farmers to grow targeted crops and increased production.
6. Enhance purchasing power: Slow farm growth and increasing farmer’s distress demand for more MSP for farmers. It helps in enhancing the purchasing capacity of farmers.

Various Committees on Minimum Support Price (MSP)

• The Agricultural Prices Commission (APC) was founded in 1965 with the purpose of recommending MSPs for agricultural commodities. The Commission for Agricultural Costs and Prices (CACP) was later given its new name. For 23 different crops, including wheat, rice, pulses, oilseeds, and cotton, the CACP suggests MSPs.
• National Commission on Farmers (NCF): The NCF was established in 2004 under the leadership of M.S Swaminatha, to address the problems of farmers and recommend policies for their welfare. The NCF recommended a minimum of 50% profit over the cost of production as MSP.
• Shanta Kumar Committee: The Shanta Kumar Committee was set up in 2014 to review the Food Corporation of India (FCI) and suggest reforms. The committee recommended a shift from price-based to income-based support for farmers.

Various issues associated with Minimum Support Price:

1. Non-proportional increase: The support prices that are being provided do not increase at par with increase in cost of production. A rating agency, CRISIL pointed out that the increase in MSP has indeed fallen during 2014-17.
2. Reach: The benefits of this scheme do not reach all farmers and for all crops. Not all farmers have been able to get the benefits of MSP because of lack of awareness. There are many regions of the country like the north-eastern region where the implementation is too weak.
3. Excess storage: MSP without sufficient storage has resulted in huge piling of stocks in the warehouses. The stock has now become double the requirements under the schemes of PDS, Buffer stock etc.
4. Market distortion: It distorts the free market by favouring some particular crops over other crops.
5. Fiscal burden: Open-ended procurement of paddy and wheat at MSPs is completely out of sync with market prices and lead to fiscal burden.
6. Impact agricultural exports: Hikes in MSP also adversely affect the exports by making Indian farm goods un-competitive especially when international market prices are lower.
7. Ecological problem: MSP leads to non-scientific agricultural practices whereby the soil, water are stressed to an extent of degrading ground water table and salinization of soil.
8. Crop diversity: MSP affects the crop diversity of india. With MSP cropping patterns get affected as it leads to production of MSP supported crops as it guarantee returns.

Determination of MSP

In formulating the recommendations in respect of the level of minimum support prices and other non-price measures, the Commission takes into account, apart from a comprehensive view of the entire structure of the economy of a particular commodity or group of commodities, the following factors:-

• Cost of production
• Changes in input prices
• Input-output price parity
• Trends in market prices
• Demand and supply
• Inter-crop price parity
• Effect on industrial cost structure
• Effect on cost of living
• Effect on general price level
• International price situation
• Parity between prices paid and prices received by the farmers.
• Effect on issue prices and implications for subsidy

The Commission makes use of both micro-level data and aggregates at the level of district, state and the country. The information/data used by the Commission, inter-alia include the following :-

• Cost of cultivation per hectare and structure of costs in various regions of the country and changes there in;
• Cost of production per quintal in various regions of the country and changes therein;
• Prices of various inputs and changes therein;
• Market prices of products and changes therein;
• Prices of commodities sold by the farmers and of those purchased by them and changes therein;
• Supply related information - area, yield and production, imports, exports and domestic availability and stocks with the Government/public agencies or industry;
• Demand related information - total and per capita consumption, trends and capacity of the processing industry;
• Prices in the international market and changes therein, demand and supply situation in the world market;
• Prices of the derivatives of the farm products such as sugar, jaggery, jute goods, edible/non-edible oils and cotton yarn and changes therein;
• Cost of processing of agricultural products and changes therein;
• Cost of marketing - storage, transportation, processing, marketing services, taxes/fees and margins retained by market functionaries; and
• Macro-economic variables such as general level of prices, consumer price indices and those reflecting monetary and fiscal factors.

The increase in MSP for Kharif Crops is in line with the Union Budget 2018-19 announcement of fixing the MSPs at a level of at least 1.5 times of the All-India weighted average Cost of Production (CoP), aiming at reasonably fair remuneration for the farmers.

• Cost provided – The MS Swaminathan Commission had recommended C2+50% but the government is providing A2+FL+50%.
• Calculation of Cost of Production
  • A2 – Actual cost of farming including seeds, fertilisers and hired labour.
  • A2+FL – Includes value of unpaid labour of family workers in addition to A2
  • C2 – Includes the cost of land rentals or interest on invested capital in addition to A2+FL