Minimum Support Price is the price at which government purchases crops from the farmers, whatever may be the price for the crops. Minimum Support Price is an important part of India’s agricultural price policy.
The MSP helps to incentivize the framers and thus ensures adequate food grains production in the country. I gives sufficient remuneration to the farmers, provides food grains supply to buffer stocks and supports the food security programme through PDS and other programmes.
Sometimes, the government procures at a higher price than the MSP. Here, the price will be referred as procurement price. The procurement price will be announced soon after the harvest. Normally, the procurement price will be higher than the MSP, but lower than the market price. The price at which the procured and buffer stocke food grains are provided through the PDS is called as issue price.
When the MSP is announced?
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). Support prices generally affect farmers’ decisions indirectly, regarding land allocation to crops, quantity of the crops to be produced etc. It is in this angle that the MSP beceomes a big incentive for the farmers to produce more quanity.
What are 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 Government of India to protect the farmers against excessive fall in price during bumper production years. The minimum support prices are a guarantee price for their produce from the Government.
The objective of the MSP is thus to ensure remunerative prices to the growers for 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:
(i) Assure remunerative and relatively stable price environment for the farmers by inducing them to increase production and thereby augment the availability of food grains.
(ii) Improve economic access of food to people.
(iii) Evolve a production pattern which is in line with overall needs of the economy.
History and trend
The MSP was declared used first time in 1965 as a tool for agricultural price policy to meet the various objectives. Since then, the MSP performs an important function in realizing the various objectives related to agricultural price policy.
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 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 cost of living, effect on 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.
Commission makes use of both micro-level data and aggregates at the level of district, state and the country.
There are various supply related information that are 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 in land, imputed value of family labour, interest value of owned capital assets (excluding land), rental value of owned land( net of land revenue), depreciation of farm implements and buildings and other miscellaneous expenses.
How many commodities are covered under the MSP?
At present, the MSP covers 24 crops that includes seven cereals (paddy, wheat, barley, jowar, bajra, maize and ragi); five pulses (gram, arhar/tur, moong, urad and lentil); eight oilseeds (groundnut, rapeseed/mustard, toria, soyabean, sunflower seed, sesamum, safflower seed and nigerseed); copra, raw cotton, raw jute and virginia flu cured (VFC) tobacco.
Procurement of agricultural crops is made by the FCI, state agencies and cooperatives.
A counterpart of the MSP is the Market Intervention Scheme (MIS), under which the state government procures perishable commodities like vegetable items.