Minimum Support Price (MSP) Raised

  Jun 26, 2020

Minimum Support Price (MSP) Raised

What is minimum support price (MSP)?

It is the price announced by the government at the beginning of the sowing season- both Kharif (summer) and Rabi (winter) crops- that it will pay to the farmer for the produce that it will procure from him after harvesting.  It is the minimum- that is, it will not pay less than this price.

How is it different from the procurement price?

MSP is announced at the beginning of the sowing season. Procurement price is the price actually paid to the farmer by the Government agency- Food Corporation of India or any other- to procure the produce. The latter is more as there is time gap as almost certainly some price rise. 

What is issue price?

It is the price at which the fair price ration shops sell the grain.

Economic cost?

It is the cost borne by the government to supply the grain through the ration shop- payment to the farmer, taxes, interest on loans, transportation, storage and labour costs.

What about food subsidy?

It is economic cost minus issue price.

What are the criteria based on which the MSP is fixed?

They are: cost of production, changes in input prices, trends in market prices, demand and supply situation, effect on general price level, effect on cost of living etc. 

Which body recommends it?

The Commission for Agricultural Costs & Prices (CACP) which is an attached office of the Ministry of Agriculture and Farmers Welfare, Government of India. It came into existence in 1965. Cabinet Committee on Economic Affairs (CCEA) decides finally. 

What is the purpose of MSP?

CACP is mandated to recommend minimum support prices (MSPs) to incentivize the cultivators to adopt modern technology, and raise productivity and overall grain production in line with the emerging demand patterns in the country. Assurance of a remunerative and stable price environment is considered very important for increasing agricultural production and productivity since the market place for agricultural produce tends to be inherently unstable, which often impose undue losses on the growers, even when they adopt the best available technology package and produce efficiently. Towards this end, MSP for major agricultural products are fixed by the government, each year, after taking into account the recommendations of the Commission. Government agencies buy whatever quantity of wheat and rice is brought by farmers into the mandis (wholesale markets), within the stipulated time and which conforms to fixed quality parameters for Central pool.

The grain thus procured is the backbone for the public distribution system where citizens are given food at subsidised price for food security.

Why is MSP in news?

CCEA raised the MSP for rabi crops. The support price of mustard, the main oilseed grown during the rabi season was raised and so was the MSP for Chana (the largest pulse crop grown during the rabi season.

Barley, masoor, gram, rapeseed/mustard, safflower and wheat MSPs were also raised. 

What are A2, A2 + FL and C2? 

CACP has categorised three types of CoPs: A2, A2+FL and C2. 

A2 represents actual cost of farming which seeds, fertilisers and hired labour.

A2+FL represents family labour in addition to A2. 

 C2 is comprehensive cost which prices in land and other rentals as also interest on invested capital in addition to A2+FL. 

C2 is the highest price followed by A2+FL and A2. Swaminathan Commission recommended C2+50 per cent.

Isn’t the MSP hike inflationary? 

It may be. But to some extent it helps farmers reinvest in agriculture and keeps agriculture away from flight of capital out of agriculture. 

When farmers realise adequate returns for their investment, it enables them to afford consumption that can boost demand, investment and growth. 

As a policy, is MSP the best for farm growth? 

No. There are many lacunae in it.

It helps wealthy farmer. Only rice and wheat farmers have benefited from it historically. They are environmentally unfriendly as they are water guzzlers. Of late, pulses and oilseeds too. Few regions like Punjab, Haryana, Western UP benefit. India’s dietary habits are changing but MSP being guaranteed payment makes them continue with these crops. Thus, crop diversification is difficult. Government’s food subsidy is about Rs.1.75 lakh crores in 2019-20. There is so much wastage.