Understanding Minimum Support Price (MSP)

Context: The Centre has announced a 5 to 10 % hike in minimum support prices (MSP) of all mandated Kharif crops for marketing season 2023-24.

Minimum support price

  • 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.

Objective: 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, govt. agencies purchase the entire quantity offered by the farmers at the announced minimum price.)
  • To induce the farmers to make capital investment for the improvement of their farm and to motivate them to adopt improved crop production technologies to step up their production and thereby their net income. In the absence of such a guaranteed price, there is a concern that farmers may shift to other crops causing shortage in these commodities.
  • MSPs are announced by the Government of India at the beginning of the sowing season for 24 notified crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP)
  • Currently announced for 24 commodities including 
    • 7 cereals (paddy, wheat, barley, jowar, bajra, maize and ragi)
    • 5 pulses (gram, arhar/tur, moong, urad and lentil)
    • 8 oilseeds (groundnut, rapeseed/mustard, toria, soyabean, sunflower seed, sesamum, safflower seed and Niger seed)
    • Copra 
    • Raw cotton
    • Raw jute 
    • Virginia flu cured (VFC) tobacco.

Method of Calculation of MSP:

The CACP takes into account of the following factors while recommending the MSP for a commodity

  • Cost of production
  • demand and supply
  • price trends in the market, (both domestic and international)
  • Inter-crop price parity;
  • Terms of trade between agriculture and non-agriculture;
  • A minimum of 50 percent as the margin over cost of production 
  • likely implications of MSP on consumers of that product

Cost of production is an important factor that goes as an input in determination of MSP, but it is certainly not the only factor that determines MSP.

Farmers Objections to the MSP:

  • Rise in MSP is less than Inflation:

Farmers argue that, apart from lentils and Mustard, none of the announced MSPs increased beyond the prevailing inflation of 6% (CPI) in the last 3 months

  • Formula to calculate the cost of production:
  A2+FL methodC2 method
‘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’ is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets, on top of A2+FL

While Govt uses A2+FL method to calculate cost of production, farmers have been demanding to use C2 method which is more comprehensive than A2+FL and also recommended by MS Swaminathan committee. 

  • Unimportant factors:

several unimportant factors like international markets, Inter-crop price parity etc. are being considered by the government to determine MSP

Other flaws with the present MSP regime:

  • MSP distorts the market driven prices and artificially increase the Agri commodity prices and make our Agri products uncompetitive in Global market
  • Often the govt doesn’t procure after the market option has been exploited by the farmer, rather it itself became a parallel market
  • MSP makes futuristic promises based on the present market scenario
  • Reach of MSP procurement is limited in terms of both crops and the geographical area. Though every year MSPs are announced for 24 crops before the sowing season begins, actual procurement at MSP is restricted to 
    • few crops such as paddy and wheat and 
    • few states where FCI network is good

To overcome the above challenges, GOI has launched PM-AASHA (Annadata aay sanrakshan abhiyan)

annadata aay sanrakshan abhiyan

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