Minimum Support Price (MSP)

In News

• Recently, the Union government has approved the Minimum Support Prices (MSP) for the Khari season 2022-23, stating that the rates are at least 1.5 times of the weighed average cost of production.
  • The rates for 14 Kharif crops have been increased, the hikes ranging from 4% to 8%.

Minimum support price (MSP)

• Meaning:
  • The MSP for a crop is the price at which the government is supposed to procure/buy that crop from farmers if the market price falls below it.
  • MSPs provide a floor for market prices, and ensure that farmers receive a certain “minimum” remuneration so that their costs of cultivation (and some profit) can be recovered.
• Objective:
  • The government incentivises the production of certain crops, thus ensuring that India does not run out of staple food grains.
  • MSPs create the benchmark for farm prices not just in those commodities for which they are announced, but also in crops that are substitutes.
• What if the prices in the market are too low?
  • This can often happen if there is a bumper crop that season, or if the international prices of a particular commodity are quite low.
  • In such a scenario, India’s farmers, who are already some of the poorest citizens of the country, will struggle to make ends meet.
  • Apart from their individual troubles, if farmers give up farming as a result of low prices, it can even put the country’s food security at risk.
  • MSPs announced by the government each year are a way to preempt such an eventuality.
• Support prices:
  • During each cropping season, the government announces minimum support prices for 23 crops.
• Crops covered:
  • 7 types of cereals (paddy, wheat, maize, bajra, jowar, ragi and barley)
  • 5 types of pulses (chana, arhar/tur, urad, moong and masoor)
  • 7 oilseeds (rapeseed-mustard, groundnut, soyabean, sunflower, sesamum, safflower, nigerseed)
  • 4 commercial crops (cotton, sugarcane, copra, raw jute)
• Who decides what the MSP would be and how?
  • The MSPs are announced by the Union government and as such, it is the government’s decision.
  • But the government largely bases its decision on the recommendations of the Commission for Agricultural Costs and Prices (CACP).
• While recommending MSPs, the CACP looks at the following factors:
  • The demand and supply of a commodity
  • Its cost of production
  • The market price trends (both domestic and international)
  • Inter-crop price parity
  • The terms of trade between agriculture and non-agriculture (that is, the ratio of prices of farm inputs and farm outputs)
  • A minimum of 50 per cent as the margin over the cost of production.
  • The likely implications of an MSP on consumers of that product.
• Three kinds of Production cost:
  • 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 forgone on owned land and fixed capital assets, on top of A2+FL.
  • CACP considers both A2+FL and C2 costs while recommending MSP.

Significance of MSP

• Better price for their crops: With the increase in the MSP, farmers will get a better price for their crops and procurement will also be done.
• Promotion to grow oilseeds: As farmers get a secured price for their crops, it will encourage more and more farmers to grow oilseeds as well as prompt them to shift away from grains.
• The area under oilseed cultivation has been on a steady rise over the last few years and with this rise, we expect it to rise further.
• Crop Diversification: There are slightly higher increases in the MSP for pulses, oilseeds and coarse cereals which helps in achieving the motive of diversifying crops.
• Differential Remuneration and protection to farmers: It helps in diversifying the crops in land use pattern. It protects farmers from the unwarranted fluctuation in prices provoked by the international level price variations. Any sharp fall in the market price of a commodity can be handled as MSP acts as a shock absorber.
• Mend demand supply imbalance: Concerted efforts were made to realign the MSPs in favour of oilseeds, pulses and coarse cereals. It encouraged farmers to shift to larger areas under these crops and adopt best technologies and farm practices, to correct demand – supply imbalance. 
• Focus on Nutri-Rich crops: The added focus on nutri-rich nutri-cereals is to incentivise its production in the areas where rice-wheat cannot be grown without long term adverse implications for groundwater table.
• Needs of consumers: MSP ensures that the country’s agricultural output responds to the changing needs of its consumers.  Ex: The government hiked the MSP of pulses to expand sowing of pulses.  
• Food Crops: The MSP incentivises production of a specific food crop which is in short supply.  
• Forward chain: The MSP leads to higher farm profits which encourage farmers to spend more on inputs, technology etc.
• Atma-nirbhar Bharat: To boost pulses and oilseeds production and reduce the country’s dependence on imports, the government increased the support price of tur by Rs 300 to Rs 6,300 per quintal for the 2021-22 crop year from Rs 6,000 per quintal last year.

Challenges associated with MSP

• Protest by Farmers: Farm unions have been protesting for more than six months on Delhi’s outskirts, demanding legislation to guarantee MSP for all farmers for all crops, and a repeal of three contentious farm reform laws.
• MSP and Inflation: When announcing the MSP, inflation should be taken into account. But often the price is not increased upto that mark. Example, this time MSP for Maize has not even considered inflation then how it will benefit farmers! Also, frequent increase in the MSPs can lead to inflation too.
• High Input costs: The input costs have been rising faster than sale prices, squeezing the meagre income of the small farmers and driving them into debt.
• Lack of Mechanism: There is no mechanism that guarantees that every farmer can get at least the MSP as the floor price in the market. So proper mechanisms need to be fixed for all times to come.
• Restriction in Exports: Even after producing surplus grains, every year a huge portion of these grains gets rotten. This is due to the restrictions under WTO Norms, that grain stocks with the FCI (being heavily subsidised due to MSP) cannot be exported.
• Limited Awareness: Farmers, specially small and marginalised ones, are less aware about the time of announcement of MSPs. It leads to them being left out of the whole virtuous cycle.
• Economically Unsustainable: The economic cost of procured rice and wheat is much higher for the FCI than the market price of the same. Due to this, the FCI’s economic burden eventually will have to be borne by the Union government and may subsequently lead to divergence of funds from being invested in agriculture infrastructure.

Way Forward

• The MSP shields farmers by guaranteeing a floor price for their produce and helps in achieving food security and tackle shortages of key food items. 
• In this importance of MSP, the Government and the Unions should amicably resolve the farmer issues so that it can benefit more than the harm it is causing. 
• Proper and rigorous implementation of ambitious projects like e-NAM, doubling farmer’s income by 2022, price stabilisation fund, recommendations of Swaminathan and Shanta Kumar committee is required.
• Strengthen the Farmers Producer Organisation (FPO) in whole farm and non-farm sectors. It will increase bargaining power of farmers on one hand and provide a suitable investment climate on the other.

Source: IE