Minimum Support Prices (MSP)

Syllabus: General Studies Paper 3

Recently, the Cabinet Committee on Economic Affairs under the chairmanship of Prime Minister approved the increase in the Minimum Support Prices (MSP) for all mandated rabi crops for marketing season 2023-24. 

• The MSP announced an increase of 2% to 9% in the Minimum Support Prices (MSP) for six mandated rabi crops for this season.
• For wheat, the MSP is ₹2,125 for a quintal. Last year, the price was ₹2,015 and the increase this year ₹110. 
• For lentil, (Masur) the increase is ₹500 per quintal (₹6000) followed by rapeseed and mustard at ₹400 per quintal (₹5,450). 
• For safflower, Centre approved an increase of ₹ 209 per quintal (₹ 5,650). 
• For gram and barley also the increase is ₹ 105 (₹5,335) and ₹ 100 (₹ 1,735) respectively per quintal.

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.

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 maximise 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.

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 favouring 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 are 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 guarantee returns.

Way Forward

• Agriculture is, perhaps, the only business where there is a high probability of both production and price risks. It may be more worthwhile to consider “how best” to make MSP work for the farmer.
• Public procurement needs to continue for staple cereals, but farmers of non-staple food crops need to be provided with direct income transfers.