In Focus: Minimum Support Prices (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 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 or floor price for their produce from the Government.

Objectives of MSP:

  • 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 MSPannouncement gives a price signal to farmers ahead of the sowing season so that they can make the right choice of crop.

Crops Covered Under MSPs:

  • Every year, MSPs are announced for 23 crops. 

  • Kharif Season Crops
    • These include 14 grown during the kharif/post-monsoon season. These include- paddy, jowar, bajra, ragi, maize, tur, moong, urad, groundnut, sunflower, soyabean, sesasum, nigerseed and cotton.



  • Rabi Season Crops
    • MSPs are also announced for 6 crops in rabi/winter season. These include- wheat, barley, chana, masur, mustard and safflower.



  • Other crops include sugarcane (covered through Fair and Remunerative Prices), jute and copra.

Recommendations for MSP:

  • The central government notifies MSPs based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). 

  • These recommendations are made separately for the Kharif marketing season (KMS) and the Rabi marketing season (RMS). 

  • The recommendations made by CACP are then approved by the Cabinet Committee on Economic Affairs (CCEA).

Timing of Announcement:

  • The minimum support prices are announced by the Government of India at the beginning of the sowing season for both rabi and kharif crops.

Determination of MSPs:

  • The CACP considers various factors such as-

  • Cost of cultivation and production

  • Productivity of crops

  • Demand situation for the commodity

  • Market price trends (domestic and global) and parity vis-à-vis other crops

  • Implications for consumers (inflation)

  • Environment (soil and water use)

  • Recommendations by Swaminathan Committee
    • The National Commission on Farmers (Chair: Prof. M. S. Swaminathan) in 2006 had recommended that MSPs must be at least 50% more than the cost of production. 



  • Costs of Production
    • The CACP calculates cost of production at three levels- A2, A2+ FL and C2.
      • ‘A2’ covers all paid-out costs of inputs directly incurred by the farmer, in cash and kind on seeds, fertilisers, pesticides, hired labour, leased-in land, fuel, irrigation, etc.

      • ‘A2+FL’ includes A2 plus an imputed value of unpaid family labour (FL).

      • ‘C2’ is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets, over and above A2+FL.



    • In Union Budget 2018-19, the government announced fixing the MSPs at a level of at least 1.5 times of the All-India weighted average Cost of Production (CoP). This is equivalent to ‘A2+FL’.



Calculation of Production Costs

  • The CACP does not do any field-based cost estimates itself.

  • It merely makes projections using state-wise, crop-specific production cost estimates provided by the Directorate of Economics & Statistics in the Agriculture Ministry.

  • The latter are, however, generally available with a three-year lag.

  • The CACP further projects three kinds of production cost for every crop, both at state and all-India average levels.

Limitations of MSP

  • The public procurement is limited to a few crops such as paddy, wheat and, to a limited extent, pulses.

  • The procurement is also limited to a few states. 



  • Three states which produce 49% of the national wheat output account for 93% of procurement. 

  • For paddy, six states with 40% production share have 77% share of the procurement. 

  • As a result, in these states, farmers focus on cultivating these crops over other crops such as pulses, oilseeds, and coarse grains.

  • Due to limitations on the procurement side (both crop-wise and state-wise), all farmers do not receive benefits of increase in MSPs. 

  • The CACP has noted in its 2018-19 price policy report that the inability of farmers to sell at MSPs is one of the key areas of concern. 

  • Farmers who are unable to sell their produce at MSPs have to sell it at market prices, which may be much lower than the MSPs.

 

Change in MSPs Over Time

  • Higher procurement of paddy and wheat, as compared to other crops at MSPs tilts the production cycle towards these crops. 

  • In order to balance this and encourage the production of pulses, there is a larger proportional increase in the MSPs of pulses over the years. 

  • In addition to this, it is also used as a measure to encourage farmers to shift from water-intensive crops such as paddy and wheat to pulses, which relatively require less water for irrigation.

Procurement of Crops

  • The Food Corporation of India is the nodal agency for procurement.

  • FCI along with State agencies, establishes purchase centres for procuring food grain under the price support scheme.

  • The State government decides on the location of these centres with the aiming of maximising purchases.

 

News Summary

  • MSP prices for rabi crops are generally announced in October or November and at times even in December.

  • However, this year, the government has announced new MSPsmuch ahead of the beginning of the rabi sowing season.

  • The new MSPswere approved by the Cabinet Committee on Economic Affairs, chaired by the Prime Minister.

  • Purpose of Early Announcement
    • Early announcement is seen as an attempt by the government to allay doubts of farmers over the future of the MSP regime in the wake of the two farm bills.

    • Some of the protesting farmers were fearing that MSP regime would be ended once the farm bills come into force.

    • The government is saying that it is committed to continuation of the MSP-based procurement system.




  • Analysis of MSPs

  • Analysis of the new MSPsshows the government’s focus on pulses and oilseeds.

  • The MSPfor lentils (pulses) got the highest increase of 6.3% (from Rs 4,800 per quintal in 2019-20 to Rs 5,100 per quintal in 2020-21) followed by mustard (5.1%), barley (4.9%), gram (4.6%), wheat (2.6%) and safflower (2.1%).

  • Procurement on the basis of these MSPswill be made in the marketing season of 2021-22, beginning April 1.

  • The price signal for pulses and oilseeds is intended to reduce the traditional skew in favour of cereals which will still deliver highest returns.

 

 Economics