Minimum Support Price Explained: All You Need to Know from Covering Crops to Concerns and Misconceptions

In India, farmers work hard all year round to grow various crops like rice and wheat, depending on the season. However, sometimes they face a big problem: what if the prices for their crops are too low in the market? This can happen if there are lots of crops in that season, or if the prices internationally are very low. When this happens, it's tough for farmers to earn enough money to support themselves and their families.

To prevent this problem, the government of India announces Minimum Support Prices (MSPs) every year for different crops. The MSPs are like a safety net for farmers. Basically, government promises to buy these crops at a certain price, and, hence, even if the market prices fall below the MSP, it does not affect the farmer. This ensures that farmers get a fair amount of money for their hard work, covering their costs, giving them some profit.

What is Minimum Support Price (MSP)?

MSP stands for Minimum Support Price, which is an amount guaranteed to the farmers by the government for their agricultural produce. The government sets Minimum Support Prices (MSP) for 23 crops each cropping season. These MSPs act as a safety net for farmers by ensuring them that they receive a fair price for their crops, even if market prices fall below a certain threshold. By providing this guaranteed income, MSPs help farmers cover their production costs and make a profit.

The Commission for Agricultural Costs and Prices (CACP) recommends MSPs based on factors like production costs, demand, supply, and market trends. The final decision on MSP levels rests with the Cabinet Committee on Economic Affairs (CCEA), chaired by the Prime Minister.

What is the Purpose of MSP

• Price Stabilization: MSPs act as a safety net, providing a floor for market prices. They ensure that farmers receive a minimum remuneration, covering their production costs and allowing for a reasonable profit margin.

• Food Security: By setting MSPs, the government incentivizes the production of key crops, preventing shortages in staple food grains. This ensures a steady supply of essential food items across the country.

Number of Crops Falls Under the Purview of MSP

The Commission for Agricultural Costs and Prices (CACP) recommends Minimum Support Prices (MSPs) for 22 specified crops, along with Fair and Remunerative Prices (FRP) for sugarcane. These include 14 crops for the kharif season, 6 for rabi, and 2 other commercial crops. Additionally, MSPs for toria and de-husked coconut are determined based on those for rapeseed/mustard and copra, respectively.

List of Crops Covered Under MSP

Cost of Production in Agriculture

The cost of production is a crucial factor in determining the viability of farming practices. The Commission for Agricultural Costs and Prices (CACP) defines three main categories of production costs applicable to every crop, both at the state and national levels in India.

• A2 Costs: This category encompasses all direct expenses incurred by the farmer, including cash and kind expenditures on seeds, fertilizers, pesticides, hired labor, leased land, fuel, and irrigation.

• A2+FL Costs: Building upon A2 costs, this category incorporates an imputed value of unpaid family labor, recognizing the contribution of household members to farming activities.

• C2 Costs: Representing the most comprehensive measure, C2 costs extend beyond A2+FL to include rentals and interest for owned land and fixed capital assets.

When determining Minimum Support Prices (MSPs), the CACP considers both A2+FL and C2 costs. However, it primarily uses C2 costs as benchmark reference costs, ensuring that MSPs adequately cover these expenses in major producing states.

Despite these considerations, defining the MSP poses a challenge. Farmer organizations advocate for the Swaminathan Committee's recommendation of C2+50 percent, while the government's announced MSP is based on the A2+FL+50 percent formula. Unlike the comprehensive nature of the C2+50 percent formula, the A2+FL+50 percent formula fails to encompass all farming costs.

The Swaminathan Committee proposed MSPs to be set "at least 50 percent more than the weighted average cost of production," yet the precise definition of this cost remains unclear, as the National Commission on Farmers did not elaborate on it in its 2006 report.

Factors Considered in Determining MSP

• Cost of Production: The Commission for Agricultural Costs and Prices (CACP) considers the expenses incurred by farmers in cultivating specific crops.

• Demand and Supply Dynamics: MSPs are adjusted based on the prevailing demand-supply scenario to maintain market equilibrium.

• Market Price Trends: CACP analyzes market trends to set MSPs that reflect fair value for farmers' produce.

• Inter-Crop Price Parity: MSPs are calibrated to maintain parity among different crops, preventing distortion in cropping patterns.

Importance of MSP

The need for Minimum Support Price (MSP) is clear because farmers face many problems. In 2014 and 2015, there were big droughts, which made crop prices drop. Then, things like Demonetisation and GST made the situation worse for rural areas, including farming. After that, the economy slowed down, and the pandemic made things even harder for farmers. Plus, the prices of things farmers need, like fuel and fertilizers, went up. MSP helps farmers get a fair price for their crops, which is important, especially in places where farming is a major way people earn a living.

Common Misconceptions about MSP

• Impactful Reach: Despite popular opinion, MSP benefits a greater proportion of farmers than is often believed; roughly 13% of paddy sellers and 16% of wheat dealers earn profit from MSP.

• Diverse Geographical Reach: Government procurement efforts have expanded beyond traditional strongholds to states like Madhya Pradesh, Chhattisgarh, and Odisha, challenging the notion that MSP benefits are confined to specific regions.

• Inclusive Beneficiaries: While there's a bias towards large farmers nationally, the majority of MSP beneficiaries are small and marginal farmers, with some states like Haryana favoring smaller farmers.

Some argue that a nationwide MSP-cum-procurement regime in India is unnecessary, fearing it would burden government stocks and increase costs. However, the Food Corporation of India doesn't procure significantly from other states, so a rise in MSP wouldn't substantially increase procurement from these regions.

Concerns Surrounding MSP in India

• Limited Reach: Despite MSPs being announced for 23 crops, only rice and wheat receive significant procurement under NFSA, leaving many farmers without benefits.

• Ineffective Implementation: Reports indicate that only 6% of MSP reaches farmers due to inadequate procurement mechanisms and restricted market access.

• Crop Imbalance: Overemphasis on MSPs for rice and wheat leads to a skewed cropping pattern, neglecting other crops and potentially limiting farmers' income.

• Middlemen Dependency: MSP-based procurement often involves intermediaries, creating inefficiencies and reducing benefits for smaller farmers.

• Government Burden: The government bears a heavy financial burden in procuring and maintaining buffer stocks, diverting resources from other agricultural or rural development programs.

Addressing these concerns is crucial for ensuring the effectiveness and fairness of the MSP system, ultimately benefiting farmers and enhancing agricultural sustainability in India.