Minimum Support Price (MSP)

MSP stands for Minimum Support Price, a market intervention by the Indian government to protect farmers from sharp drops in prices. It can also stand for Managed Service Provider, a company that sells services to customers under a subscription model.

About MSP

• MSP is the guaranteed amount paid to farmers when the government buys their produce.
• MSP is based on the recommendations of the Commission for Agricultural Costs and Price (CACP) which considers various factors such as cost of production, demand and supply, market price trends, inter-crop price parity, etc.
  • CACP is an attached office of the Ministry of Agriculture and Farmers Welfare. It came into existence in January 1965.
• The Cabinet Committee on Economic Affairs (CCEA) chaired by the Prime Minister of India takes the final decision (approve) on the level of MSPs.
• The MSP is aimed at ensuring remunerative prices to growers for their produce and encouraging Crop Diversification.

Crops Under MSP

• The CACP recommends MSPs for22 mandated crops and fair and remunerative price (FRP) for sugarcane.
• The mandated crops include 14 crops of the kharif season, 6 rabi crops and 2 other commercial crops.

How is MSP Calculated

The CACP takes into account various factors when recommending MSP, such as cultivation costs, supply, and demand situations, market price trends (both domestic and global), and the impact on consumers, and the environment.

• The CACP projects three kinds of production cost for every crop, both at state and all-India average levels.
  • ‘A2’: 
    • Covers all paid-out costs 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.
  • ‘C2’: 
    • It is a more comprehensive cost that factors in rentals and interest for owned land and fixed capital assets, on top of A2+FL.
• CACP considers both A2+FL and C2 costs while recommending MSP.
  • 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 final decision on Minimum Support Price levels and other recommendations is made by the Cabinet Committee on Economic Affairs (CCEA) of the Union government.

Need of Reforms in MSP

• The twin droughts of 2014 and 2015 forced the farmers to suffer from declining commodity prices since 2014.
• The twin shocks of Demonetisation and the Rollout of GST, crippled the rural economy, primarily the non-farm sector, but also agriculture.
• The slowdown in the economy after 2016-17 followed by the pandemic further ensured that the situation remains precarious for the majority of the farmers.
• Higher input prices for diesel, electricity and fertilisers have only contributed to the misery.
• It ensures that farmers receive a fair price for their crops, which helps in reducing farm distress and poverty. This is particularly crucial in states where agriculture is a major source of livelihood.

Concerns Related to MSP in India

• Limited Extent:
  • The MSP is officially announced for 23 crops, but in practice, only two, rice and wheat, are extensively procured and distributed under the National Food Security Act (NFSA).
  • For the rest of the crops, the MSP implementation is ad-hoc and insignificant. This means that the majority of farmers growing non-target crops do not benefit from the MSP.
• Ineffective Implementation:
  • The Shanta Kumar Committee, in its 2015 report, revealed that only 6% of the MSP was actually received by farmers.
  • This suggests that a significant portion of farmers, around 94%, do not benefit from the MSP. The primary reason for this is inadequate procurement mechanisms and market access for farmers.
• Skewed Crop Dominance:
  • The focus on MSP for rice and wheat has led to a skewed cropping pattern in favor of these two staples. This overemphasis on these crops can have ecological, economic, and nutritional implications.
  • It may not align with market demands, thereby limiting income potential for farmers.
• Middlemen Dependency:
  • The MSP-based procurement system often involves intermediaries such as middlemen, commission agents, and officials from Agricultural Produce Market Committees (APMCs).
  • Smaller farmers, in particular, may find it challenging to access these channels, leading to inefficiencies and reduced benefits for them.
• Burden on Government:
  • The government shoulders a significant financial burden in procuring and maintaining buffer stocks of MSP-supported crops. This diverts resources that could be allocated to other agricultural or rural development programs.

Demand to Legalize MSP

• Farmers Get Lower Prices:
  • Farmers across India often receive prices for their crops that are below the officially declared MSP. Since MSPs lack legal backing, farmers cannot enforce these prices as a right.
• Limited Government Procurement:
  • The government’s actual purchase of crops at MSP is restricted. Only about one-third of wheat and rice crops and 10%-20% of selected pulses and oilseeds are procured at MSP rates. The majority of farmers do not have access to this benefit.

Challenges with Legalizing MSP

• The Unsustainability of Statutory MSP:
  • Legalizing MSP poses challenges as a fixed predetermined price could deter private traders from participating when there is excess production and a decline in market prices. This would result in the government becoming the primary buyer of most crops, which is not a sustainable approach.
• Potential for Corruption and Leakage:
  • Legalizing MSP could increase the risk of corruption and improper distribution or diversion of crops from warehouses, ration shops, or during transportation.
• Disposal Challenges:
  • While selling cereals and pulses through the public distribution system is relatively straightforward, it becomes more complex to dispose of crops like niger seed, sesamum, or safflower.
• Inflationary Impact:
  • Higher procurement costs under MSP could lead to increased prices of food grains, causing inflation that would ultimately affect the poor.
• Impact on Farm Exports:
  • If MSP prices exceed prevailing international rates, it could negatively impact India’s agricultural exports, which currently contribute 11% to total commodity exports.