- 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 the Government of India to protect the producer – farmers – against excessive fall in price during bumper production years.
- The minimum support prices are a guaranteed 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.
Historical perspective of MSP
- The Price Support Policy of the Government is directed at providing insurance to agricultural producers against any sharp fall in farm prices. The minimum guaranteed prices are fixed to set a floor below which market prices cannot fall. Till the mid-1970s, Government announced two types of administered prices :
- Minimum Support Prices (MSP)
- Procurement Prices
- The MSPs served as the floor prices and were fixed by the Government in the nature of a long-term guarantee for investment decisions of producers, with the assurance that prices of their commodities would not be allowed to fall below the level fixed by the Government, even in the case of a bumper crop.
- Procurement prices were the prices of Kharif and Rabi cereals at which the grain was to be domestically procured by public agencies (like the FCI) for release through PDS.
- It was announced soon after harvest began. Normally the procurement price was lower than the open market price and higher than the MSP. This policy of two official prices being announced continued with some variation up to 1973-74, in the case of paddy. In the case of wheat, it was discontinued in 1969 and then revived in 1974-75 for one year only. Since there were too many demands for stepping up the MSP, in 1975-76, the present system was evolved in which only one set of prices was announced for paddy (and other Kharif crops) and wheat being procured for buffer stock operations.
Determination of MSP
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 the cost of living
- Effect on the general price level
- International price situation
- Parity between prices paid and prices received by the farmers.
- Effect on issue prices and implications for subsidy
The Commission makes use of both micro-level data and aggregates at the level of district, state and the country. The information/data used by the Commission, inter-alia include the following:-
- Cost of cultivation per hectare and structure of costs in various regions of the country and changes therein;
- Cost of production per quintal in various regions of the country and changes therein;
- Prices of various inputs and changes therein;
- Market prices of products and changes therein;
- Prices of commodities sold by the farmers and of those purchased by them and changes therein;
- Supply related information – area, yield and production, imports, exports and domestic availability and stocks with the Government/public agencies or industry;
- Demand related information – total and per capita consumption, trends and capacity of the processing industry;
- Prices in the international market and changes therein, demand and supply situation in the world market;
- Prices of the derivatives of the farm products such as sugar, jaggery, jute goods, edible/non-edible oils and cotton yarn and changes therein;
- Cost of processing of agricultural products and changes therein;
- Cost of marketing – storage, transportation, processing, marketing services, taxes/fees and margins retained by market functionaries; and
- Macro-economic variables such as general level of prices, consumer price indices and those reflecting monetary and fiscal factors.
The increase in MSP for Kharif Crops is in line with the Union Budget 2018-19 announcement of fixing the MSPs at a level of at least 1.5 times of the All-India weighted average Cost of Production (CoP), aiming at reasonably fair remuneration for the farmers.
The Objectives of MSP
- Government’s agricultural policy has three important components– the MSP, Buffer Stocks and issue of food grains through the PDS. The interconnectivity between the three is very clear. MSP helps to procure adequate food grains through FCI, state agencies and cooperatives. The PDS network through the policy of issue price delivers it to the weaker sections.
- MSP is price fixed by the Government of India to protect the farmers against excessive fall in price during bumper production years. The minimum support prices are a guaranteed price for their produce from the Government.
- The objective of the MSP is thus to ensure remunerative prices to the growers by encouraging higher investment and production. It also aims to bring a balanced realization of sufficient food production and consumption needs at the same ensuring adequate and affordable food grains to all the people.
Thus the minimum support price is aimed to:
- Assure remunerative and relatively stable price environment for the farmers by inducing them to increase production and thereby augment the availability of food grains.
- Improve economic access to food to people.
- Evolve a production pattern which is in line with the overall needs of the economy.
Who declares and who prepares it?
- The Cabinet Committee on Economic Affairs (CCEA), Government of India, determines the Minimum Support Prices (MSP) of various agricultural commodities in India based on the recommendations of the Commission for Agricultural Cost and Prices (CACP).
What is open-ended MSP?
- Government considers that some types of crops are vital for food security. To ensure and encourage the production of such crops the government follows a much liberal procurement policy known as open-ended MSP.
- In this case, there is no procurement target. The government allows the procurement agencies like the FCI to buy whatever is offered by the farmers for sale at MSP. The major staple food items – rice and wheat are the two principal commodities where government’s role is pronounced.
How MSP is calculated for each crop?
- The MSP is calculated and recommended by the CACP. For the calculation of the MSP, the CACP takes into account a comprehensive view of the entire structure of the economy of a particular commodity or group of commodities. Other factors include the cost of production, changes in input prices, input-output price parity, trends in market prices, demand and supply, inter-crop price parity, the effect on industrial cost structure, the effect on the cost of living, effect on the general price level, international price situation, parity between prices paid and prices received by the farmers and effect on issue prices and implications for subsidy.
- The commission makes use of both micro-level data and aggregates at the level of district, state and the country.
- There is various supply related information that is needed to estimate the MSP. These are – area, yield and production, imports, exports and domestic availability and stocks with the Government/public agencies or industry, cost of processing of agricultural products, cost of marketing – storage, transportation, processing, marketing services, taxes/fees and margins retained by market functionaries; etc. are also considered.
- Different Ministries and Departments help the Commission to arrive at the MSP. The estimates of Cost of Cultivation/Cost of Production, an important input for forming the recommendation of MSP, are made available to the Commission through the Comprehensive Scheme for Studying the Cost of Cultivation of Principal Crops, operated by the Directorate of Economics and Statistics, Department of Agriculture and Cooperation, Ministry of Agriculture, Government of India.
- These estimates take into account real factors of production and include all actual expenses in cash and kind incurred by the farmer in production, rent paid for leased inland, the imputed value of family labour, interest value of owned capital assets (excluding land), the rental value of owned land( net of land revenue), depreciation of farm implements and buildings and other miscellaneous expenses.
- On 18th November 2004, the Union government formed the National Commission on Farmers (NCF) with MS Swaminathan as its chairman.
- The main aim of the committee was to come up with a sustainable farming system, make farm commodities cost-competitive and more profitable.
- It, in 2006, recommended that MSPs must be at least 50% more than the cost of production.
It talked about the cost of farming at three levels:
- A2: All the types of cash expenditure to generate the crop like seeds, manure, chemicals, labour costs, fuel costs and irrigation costs.
- A2+FL: It includes A2 plus an imputed value of unpaid family labour.
- C2: Under C2, the estimated land rent and the cost of interest on the money taken for farming are added to A2 and FL.