Minimum Support Prices (MSP): Detail Explanation

Recently, the Minimum Support Prices (MSP) for all required rabi crops for the marketing season 2023–2024 were raised with the approval of the Cabinet Committee on Economic Affairs, which is chaired by the Prime Minister.

Major Points

• MSP increase for the wheat crop: Rs 110 per quintal (5.46%) more.
• Other rabi crops, including rapeseed, mustard, safflower, gramme, and lentil (masur), have increased by 2.01 to 9.09 per cent.
• The maximum increase in MSP: Masur lentils have received the highest increase in MSP, approved at Rs 500 per quintal, in absolute terms.
• Rapeseed and mustard are next (rs 400 per quintal), then safflower ( rs209 per quintal), gram ( rs105 per quintal), and barley (rs400 per quintal) (Rs 100 per quintal).
• Increase in wheat MSP: When compared to last year, the increase in wheat MSP is greater both in absolute and percentage terms.
• The MSP for wheat has increased by Rs 110 per quintal, the most since 2017–2018, when an equal increase was made from Rs 1,625 to Rs 1,735.
• In accordance with the Union Budget for 2018–19, it was announced that the MSP would be set at a level that was at least 1.5 times the weighted average cost of production for all of India, with the goal of providing farmers with a fairly equitable wage.

A rise in Wheat MSP is Required

• Given the decreased production and procurement during the recently concluded rabi season, the increase in the wheat MSP assumes significance.
• The estimated 2021–22 wheat production is 106.84 million tonnes, which is less than the year's target of 110 million tonnes and the 109.59 million tonnes actually produced in 2020–21.
• While there was a slight decrease in production in 2021–2022, there was a sharp decrease in the amount of wheat purchased for the Central pool.
• In recent months, the retail and wholesale costs of wheat and "atta" (wheat flour) have both increased significantly.

Minimum support price (MSP)

• Means: If the market price falls below the MSP for a crop, the government is required to purchase the crop from farmers.
• MSPs set a floor for market prices and guarantee farmers a set "minimum" wage in order to cover their cultivation costs (and a portion of their profit).
• The government encourages the growth of specific crops in order to prevent a shortage of India's staple foods.
• MSPs establish the benchmark for farm prices for both the crops that serve as substitutes as well as the commodities for which they are announced.
• The government sets minimum support prices for 23 crops during each cropping season.
• 7 varieties of cereal (paddy, wheat, maize, bajra, jowar, ragi and barley)
• 5 different types of pulses (Chana, arhar/tur, urad, moong, and masoor).
• 7 oilseeds (rapeseed-mustard, groundnut, soyabean, sunflower, sesamum, safflower, nigerseed)
• 4 industrial crops (cotton, sugarcane, copra, raw jute)

What if the market's prices are too low?

• This frequently occurs when there is a bumper crop that year or when the global price of a specific commodity is quite low.
• Farmers in India, already among the poorest people in the nation, would find it difficult to make ends meet in such a situation.
• Aside from their own problems, if farmers stop farming due to low prices, it could even jeopardise the nation's food security.

The government issues MSPs each year as a way to foresee such a situation.

Who makes the decisions regarding the MSP, and how?

• The Union government makes the announcement of the MSPs, so that decision belongs to the government.
• But the Commission for Agricultural Costs and Prices' recommendations are what the government relies on most when making decisions (CACP).

The CACP considers the following aspects when making MSP recommendations:

• A commodity's supply and demand
• The price of producing it
• Trends in market prices (both domestic and international)
• Parity in inter-crop prices
• The price difference between farm inputs and farm outputs, or the terms of trade between agriculture and non-agriculture, must be at least 50% higher than the cost of production.
• the most likely effects of an MSP on that product's customers.

Costs of Production in Three Forms

• For every crop, the CACP projects three different types of production costs, both at state- and India-wide average levels.
• 'A2': Pays for all direct expenditures made by the farmer for things like seeds, fertiliser, pesticides, hired labour, leased land, fuel, irrigation, and so forth.
• "C2": It is a more comprehensive cost that, in addition to A2+FL, takes into account rentals, interest is forgone on owned land, and fixed capital assets.
• When recommending MSP, CACP takes into account both A2+FL and C2 costs.

Importance of MSP

• Better price for their crops: Farmers will receive a better price for their crops thanks to the increase in the MSP, and procurement will also take place.
• Promotion of oilseed production: As farmers receive a guaranteed price for their crops, they will be more inclined to grow oilseeds and move away from grain production.
• Crop Diversification: The MSP increases for pulses, oilseeds, and coarse cereals are slightly higher, which aids in the goal of crop diversification.
• Differential compensation and protection for farmers: This promotes crop diversification in terms of land use. It shields farmers from unwarranted price fluctuations brought on by price variations at the international level. MSP serves as a shock absorber, allowing for the handling of any abrupt drops in market prices for commodities.
• Redress the imbalance between supply and demand: Efforts were made to realign the MSPs in favour of coarse grains, pulses, and oilseeds. To balance out the supply and demand, it encouraged farmers to plant these crops on larger plots of land and to use the best farming practices and technologies.
• Increased emphasis on nutrient-rich crops is intended to encourage their production in regions where growing rice or wheat would have a negative impact on the groundwater table over the long term.
• Consumer needs: MSP makes sure that the agricultural output of the nation adapts to the shifting needs of its consumers. Ex: To increase pulse sowing, the government increased the MSP for pulses.
• Food Crops: The MSP encourages the growth of one particular food crop that is in short supply.
• The MSP increases farm profits, which in turn motivates farmers to spend more on inputs, technology, etc. in the forward chain.

The difficulties with MSP

• Farmers' protest: On the outskirts of Delhi, farm unions have been demonstrating for more than six months in favour of legislation that would guarantee MSP to all farmers for all crops as well as the repeal of three divisive farm reform laws.
• MSP and Inflation: Inflation should be considered when announcing the MSP. But frequently, the price is not raised to that level. For instance, the MSP for maize this time has not even taken into account inflation and how it will benefit farmers! Inflation can also be caused by the MSPs' frequent increases.
• High input costs: The small farmers' meagre income has been squeezed and they have been forced into debt as a result of input costs rising faster than sales prices.
• Absence of Mechanism: There is no mechanism that ensures that each farmer will receive at least the MSP as the market floor price. Therefore, proper mechanisms must be fixed for all future times.
• Export Restrictions: Even after producing surplus grains, a significant amount of these grains spoil every year. This is because grain stocks with the FCI—which are heavily subsidised due to MSP—cannot be exported due to restrictions under WTO norms.
• Limited Knowledge: Farmers, particularly small and marginalised ones, are less aware of the date and time that MSPs are announced. They end up being excluded from the entire virtuous cycle as a result.

Way Forward

• Perhaps the only industry where both production and price risks are likely to occur is agriculture. It might be more beneficial to think about "the best" ways to make MSP work for farmers.

• The public procurement of staple cereals must continue, but direct income transfers must be given to farmers of non-staple food crops.

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