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. The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP). MSP is price fixed by Government of India to protect the producer – farmers – against excessive fall in price during bumper production years. The government of India sets the MSP twice a year for 24 commodities.
The chief objectives of setting up MSP are:
- Support farmers from distress sale
- 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.
Importance of Minimum Support Price:
- Fixed Remunerations: The farmers are financially secured against the vagaries of price instability in the market. It provides security to farmers from the risk of crop failure and less production.
- Informed decision making: MSP are announced at the beginning of the sowing season, this helps farmers make informed decisions on the crops they must plant. This advance information helps the farmer to make an informed decision about which crop to sow for maximum economic benefit within the limitations of his farm size, climate and irrigation facilities.
- Diversification of crops: The MSP announced by the Government of India for the first time in 1966-67 for wheat has been extended to around 24 crops at the present. This has encouraged the farmers to grow these diverse crops to maximize their income.
- Benchmark for private buyers: MSP sends a price-signal to market that if merchants don’t offer higher than MSP prices the farmer may not sell them his produce. Thus it acts as an anchor or benchmark for the agro-commodity. It ensures the market prices will not be drastically lower than MSP.
- Targeted crops: MSP is used as a tool to incentivize production of specific food crops which is short in supply. MSP motivates farmers to grow targeted crops and increased production.
- Enhance purchasing power: Slow farm growth and increasing farmer’s distress demand for more MSP for farmers. It helps in enhancing the purchasing capacity of farmers.
Determination of Minimum Support Price
According to the Evaluation Report on Minimum Support Price by Development Monitoring and Evaluation Office NITI AAYOG
- The prices of agricultural commodities are inherently unstable, primarily due to the variation in their supply, lack of market integration and information asymmetry -a very good harvest in any year results in a sharp fall in the price of that commodity during that year which in turn will have an adverse impact on the future supply as farmers withdraw from sowing that crop in the next / following years. This then causes scarcity of supply next year and hence, major price increase for consumers.
- To counter this, MSP for major agricultural products is fixed by the government, each year. MSP is a tool which gives guarantee to the farmers, prior to the sowing season, that a fair amount of price is fixed to their upcoming crop to encourage higher investment and production of agricultural commodities. The MSP is in the nature of an assured market at a minimum guaranteed price offered by the government.
- The MSP is fixed on the recommendations of the Commission for Agricultural Costs and Prices (CACP). The CACP is a statutory body and submits separate reports recommending prices for Kharif and Rabi seasons. The Central Government after considering the report and views of the State Governments and also keeping in view the overall demand and supply situation in the country, takes the final decision.
Fixation of MSP
- 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, fertilizers, pesticides, hired labor, leased-in land, fuel, irrigation, etc.
- ‘A2+FL’ includes A2 plus an imputed value of unpaid family labor.
- ‘C2’ is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets, on top of A2+FL.
MSP and Economy
- Hiking the MSP without investing in infrastructure is just a short-term play. While it does deliver immediate results, long-term developments to back-it up are also important.
- MSP covers numerous costs such as the cost of sowing (A2) and labor (FL). These considerations are controversial with suggestions that it should be based on comprehensive costs (C2), which also include land rent costs.
- Too much of a hike on MSP either paves way for inflationary effects on the economy, with a rise in prices of food grains and vegetables, or loss to government treasury if it decides to sell at a lower price as compared to the higher MSP it bought at.
- MSP is a nationwide single price policy. However, the actual costing for production varies from place to place, more severely so in areas lacking irrigation facilities and infrastructure.
- Market prices should ideally never be below MSP. If they fall below the MSP, in concept, the farmer can always sell it to the government, which will then resell it or store as buffer. However, practically this does not always happen.
Uses of MSP
- To protect the producer – farmers – against excessive fall in price during bumper production years.
- The minimum support prices are a guarantee price for their produce from the Government
- 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.
Various issues associated with Minimum Support Price:
- Non-proportional increase: The support prices that are being provided do not increase at par with increase in cost of production. A rating agency, CRISIL pointed out that the increase in MSP has indeed fallen during 2014-17.
- Reach: The benefits of this scheme do not reach all farmers and for all crops. Not all farmers have been able to get the benefits of MSP because of lack of awareness. There are many regions of the country like the north-eastern region where the implementation is too weak.
- Excess storage: MSP without sufficient storage has resulted in huge piling of stocks in the warehouses. The stock has now become double the requirements under the schemes of PDS, Buffer stock etc.
- Market distortion: It distorts the free market by favoring some particular crops over other crops.
- Fiscal burden: Open-ended procurement of paddy and wheat at MSPs is completely out of sync with market prices and lead to fiscal burden.
- Impact agricultural exports: Hikes in MSP also adversely affect the exports by making Indian farm goods un-competitive especially when international market prices are lower.
- Ecological problem: MSP leads to non-scientific agricultural practices whereby the soil, water is stressed to an extent of degrading ground water table and salinization of soil.
- Crop diversity: MSP affects the crop diversity of India. With MSP cropping patterns get affected as it leads to production of MSP supported crops as it guarantees returns.
MSP in India
- The Cabinet Committee on Economic Affairs (CCEA) has approved an increase in the minimum support prices (MSPs) for all mandated kharif crops, including paddy, pulses and cotton, for the 2020-21 marketing season.
Sources: Evaluation Report on Minimum Support Price by Development Monitoring and Evaluation Office NITI AAYOG
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