Minimum Support Price

Context: Recently the agriculture ministry has approved the MSP hike for six crops.

Background

  • The decision of MSP hike has come amid vehement protests by farmers, who fear that the new agricultural marketing reforms through 3 bills would result in the phasing out of MSP and public procurement.

Crops for which MSP has been increased

  • The MSP for wheat will be increased by 2.6% or ₹50 per quintal to ₹1,975 per quintal for the upcoming rabi or winter crop season.
  • The MSP rates were also hiked for five other winter crops — barley, gram, masur dal, safflower, and rapeseed and mustard.

What is 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.
  • MSP is the minimum price set by the Government at which farmers can expect to sell their produce for the season.
  • When market prices fall below the announced MSPs, procurement agencies step in to procure the crop and ‘support’ the prices. Hence 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.
  • The Cabinet Committee of Economic Affairs announces MSP for various crops at the beginning of each sowing season based on the recommendations of the Commission for Agricultural Costs and Prices (CACP).
  • The FCI and Nafed help the Centre procure select food crops with the help of the States. Procured farm products are kept in government warehouses and distributed through the PDS and various food security programmes.
  • Currently, there are 20-plus crops that have an MSP announced for them every year before the beginning of the kharif and rabi seasons.

Factors taken into consideration for fixing MSP include:

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

Cost of Production

  • CACP considers both A2+FL and C2 costs while recommending MSPs. CACP reckons only A2+FL cost for return.
  • However, C2 costs are used by CACP primarily as benchmark reference costs (opportunity costs) to see if the MSPs recommended by them at least cover these costs in some of the major producing States.
  • The Union Budget for 2018-19 had announced the pre-determined principle to keep MSP at levels of one and half times of the cost of production. Accordingly, Government has increased the MSPs for all mandated Kharif, Rabi and other commercial crops with a return of atleast 50 per cent of cost of production for the agricultural year 2018-19.
  • During 2019-20 also, Government has increased the MSP of all mandated kharif and rabi crops in line with the principle of fixing the MSP with a return of atleast 50 per cent of the cost of production.

Formulae to arrive at the cost of production

The CACP has three formulae to arrive at the cost of production: A2, A2+FL and C2.

  • A2 costs cover all paid-out expenses, both in cash and kind, incurred by farmers on seeds, fertilisers, chemicals, hired labour, fuel and irrigation, among others.
  • A2+FL covers actual paid-out costs plus an imputed value of unpaid family labour.
  • C2 costs are more comprehensive, accounting for the rentals and interest forgone on owned land and fixed capital assets respectively, on top  of A2 + FL

Crops Covered

  • Government announces minimum support prices (MSPs) for 22 mandated crops and fair and remunerative price (FRP) for sugarcane.
  • The mandated crops are 14 crops of the kharif season, 6 rabi crops and two other commercial crops. In addition, the MSPs of toria and de-husked coconut are fixed on the basis of the MSPs of rapeseed/mustard and copra, respectively. The list of crops are as follows.
    • Cereals (7) – paddy, wheat, barley, jowar, bajra, maize and ragi
    • Pulses (5) – gram, arhar/tur, moong, urad and lentil
    • Oilseeds (8) – groundnut, rapeseed/mustard, toria, soyabean, sunflower seed, sesamum, safflower seed and nigerseed
    • Raw cotton
    • Raw jute
    • Copra
    • De-husked coconut
    • Sugarcane (Fair and remunerative price)
    • Virginia flu cured (VFC) tobacco

Advantages

  • Price volatility makes life difficult for farmers. Though prices of agri commodities may soar while in short supply, during years of bumper production, prices of the very same commodities plummet.
  • MSPs ensure that farmers get a minimum price for their produce in adverse markets. MSPs have also been used as a tool by the Government to incentivise farmers to grow crops that are in short supply.

Criticisms

  • The Government of India has an MSP for 23 crops, but procurement at the MSP is effectively limited to rice and wheat, and that too concentrated in a few States only.
  • Some critics argue that a rise in the MSP will lead to increase in food inflation, while others that it will augment farmers’ income
  • Substantial proportion of crops are sold to local private traders and input dealers to whom the resource-poor marginal and small landholders are obligated to sell their crops due to tie-up with credit.
  • A vast majority of the farming population is unaware of its existence as per the National Sample Survey’s (NSS) Situation Assessment Survey of Agricultural Households 2013, even for paddy and wheat, less than one-third of farmers were aware of the MSP; for other crops, such awareness was negligible.

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