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What is Minimum Support Price?

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  • Last Updated : 09 Nov, 2022
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The Minimum Support Price, or MSP, is commonly referred to as a method of protecting farmers in India from the market and natural disaster uncertainties. The MSP, which serves as a “safety net” for farmers, is at the heart of the agricultural revolution that has transformed India from a food-deficient to a food-surplus nation. Over the years, the MSP has assisted Indian farmers in mitigating the effects of financial fluctuations. After the farmers’ protests reached the national capital, the MSP became a major talking point.

MSP implemented in India

At the time of independence, India faced a significant deficit in cereal production. After a difficult first decade, India decided to implement extensive agricultural reforms. The Minimum Support Price was introduced for the first time by the Centre in 1966-67. For the first time, the MSP for wheat was fixed at Rs 54 per quintal.

On the path of the Green Revolution, Indian policymakers recognized the need for farmers to be rewarded for growing food crops. Otherwise, they will avoid crops such as wheat and paddy because they are labor-intensive and do not yield high returns. As a result, the MSP was introduced in the 1960s to incentivize farmers and boost production.

How does the government decide on the MSP?

  • There are two major cropping seasons in India: ‘Rabi’ and ‘Kharif.’
  • The MSP is announced by the government at the start of each cropping season.
  • The MSP is determined after the government thoroughly studies the major points raised by the Agricultural Costs and Prices Commission.
  • These recommendations are based on pre-set formulae. This includes the actual cost incurred, as well as the implied family labor and the cost of fixed assets or rent paid by the farmers.
  • These variables are known as A2, FL, and C2 in technical terms. The government calculates the MSP by frequently adding all of these.

How is MSP determined for each crop?

  • The Commission for Agricultural Costs and Prices(CACP) calculates and recommends the MSP. The CACP uses a comprehensive view of the entire structure of the economy of a particular commodity or group of commodities to calculate the MSP. 
  • Other factors include the cost of production, changes in input prices, input-output price parity, market price trends, demand and supply, inter-crop price parity, the effect on industrial cost structure, the effect on the cost of living, the effect on the general price level, the international price situation, the effect on issue prices, and the implications for subsidy.
  • The Commission employs both micro-level data and aggregates at the district, state and national levels.
  • To estimate the MSP, various supply-related information is required. Area, yield, and production, imports, exports, and domestic availability and stocks with the government/public agencies or industry, cost of processing agricultural products, cost of marketing – storage, transportation, processing, marketing services, taxes/fees, and margins retained by market functionaries, and so on, are all taken into account.
  • The Commission is assisted in arriving at the MSP by various Ministries and Departments. The estimates of the Cost of Cultivation/Cost of Production, an important input for developing MSP recommendations, are made available to the Commission by the Directorate of Economics and Statistics, Department of Agriculture and Cooperation, Ministry of Agriculture, Government of India.
  • These estimates include all actual cash and kind expenses incurred by the farmer in production, rent paid for leased land, the imputed value of family labor, interest value of owned capital assets (excluding land), the rental value of owned land (net of land revenue), depreciation of farm implements and buildings, and other miscellaneous expenses.

Challenges Faced during MSP

  • The main issue with the MSP, with the exception of wheat and rice, which the Food Corporation of India actively purchases under the PDS, is a lack of government equipment for the procurement of all crops. Farmers in states where the government buys all of the last mile grain benefit more, while those in states where the government buys less grain are frequently impacted.
  • The MSP-based procurement system also relies on intermediaries, commission agents, and APMC representatives, all of whom smaller farmers find difficult to reach.
  • Problems with disposal include: Cereals and pulses, unlike Niger seed, sesame, or safflower, can be distributed through the public distribution system.
  • Increased procurement costs would result in higher food grain prices, affecting the poor in the long run.
  • If the MSP is higher than the current international market price, it will have an impact on India’s agricultural exports. Farm products account for 11% of all commodity exports.
  • Farmers growing fruits and vegetables, spices, and other crops will seek the same if the Centre passes legislation ensuring 100% procurement in all 23 crops where MSP is announced.

Factors supporting the MSP

  • The CACP considers several criteria when recommending the MSP for a product, including the cost of cultivation.
  • It takes into account the commodity’s supply and demand dynamics, domestic and international market price trends, parity with other crops, consumer consequences (inflation), environmental consequences (soil and water consumption), and trade agreements between the agricultural and non-agricultural sectors.

Crops Eligible in MSP

CerealsPaddy, wheat, maize, bajra, jowar, ragi, and barley
PulsesMasur, chana, arhur, urad, moong
Oil seedsRapeseed, groundnut, soya bean, sunflower, sesamum, safflower
Commercial cropsCotton, sugarcane, copra, and raw jute

Types of Production costs taken into account for MSP

The CACP forecasts three types of production costs for each crop, both at the state and national levels.

  1. ‘A2’: Covers all direct cash and kind costs incurred by the farmer on seeds, fertilizers, pesticides, hired labor, leased-in land, fuel, irrigation, and so on.
  2. ‘A2+FL’: A2 plus an estimated value of unpaid family labor.
  3. ‘C2’: Comprises ‘A2+FL’, as well as revenue foregone on owned land (rent) and fixed capital assets (interest).

The MSP also serves another purpose. The government uses them to encourage the growth of specific crops, preventing a shortage of India’s main grains. MSPs typically set the standard for agricultural prices for both substitute crops and the commodities for which they are announced.

The Way Forward

  • A true MSP necessitates the government intervening whenever market prices fall below a predetermined level, primarily in cases of excess production and oversupply or a price collapse caused by international factors.
  • MSP can also be used as an incentive price for many crops that are important for nutritional security, such as coarse cereals, as well as pulses and edible oils, for which India is reliant on imports.
  • Investing more in animal husbandry (including fisheries) and more nutritious fruits and vegetables is wise.
  • Incentivizing the private sector to build efficient value chains based on a cluster approach is the best way to invest.

FAQs on Minimum Support Price (MSP)

Question 1: Is MSP a government subsidy?


MSP is not an income support programme by definition; rather, it is intended to be used as a government intervention to stabilise prices and provide remunerative prices to farmers. It is a public procurement programme designed to meet the National Food Security Act (NFSA) of 2013.

Question 2: What exactly is the minimum support price scheme?


The MSP is the rate at which the government purchases crops from farmers, and it is calculated as at least one-and-a-half times the farmers’ cost of production. MSP is a “minimum price” for any crop that the government deems profitable for farmers and thus worthy of “support.”

Question 3: When was MSP first implemented?


MSP stands for a minimum support price. It was first used for wheat in the 1965-66 season (July-June), and it now covers 23 crops. It is announced several weeks before the Kharif and Rabi planting seasons. When India faced a food grain shortage, it was implemented to encourage farmers to grow food crops.

Question 4: What are the drawbacks of MSP?


MSP rates remain stagnant: Despite being announced every year, the Minimum Support Price does not rise in proportion to the cost of production. Inadequate awareness: Many illiterate farmers who are unaware of the Minimum Support Price are taken advantage of by middlemen.

Question 5: In India, how does MSP work?


The government announces minimum support prices for 23 crops during each cropping season. Simply put, the MSP for a crop is the price that the government is supposed to procure/buy from farmers if the market price falls below it.

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