Articulating Minimum Support Price

Whenever Agriculture is discussed, one term extensively dominates the sector :  MSP, Minimum Support Price. The Minimum Support Prices is significant in terms as it affects farmers’ decisions indirectly like land allocation to crops and the quantity of the crops to be produced etc. This makes the MSP a big incentive for the farmers to produce a definite amount of quantity. MSP were announced by the Government of India for the first time in 1966-67 for Wheat in the wake of the Green Revolution and extended harvest, to save the farmers from depleting profits. Since then, the MSP regime has been expanded from one to 26-27 crops. 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 prominent. 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. 

Why MSP ?

Minimum Support Price is the price at which farmers sell their produce to the government. The MSP is announced by the Government of India at the beginning of each season viz. Rabi and Kharif. 

The Price Support Policy of the Government is directed at providing insurance to agricultural producers against any sharp fall in farm prices. The minimum guaranteed prices are fixed to set a floor below which market prices cannot fall. The MSPs served as the floor prices and were fixed by the Government in the nature of a long-term guarantee for investment decisions of producers, with the assurance that prices of their commodities would not be allowed to fall below the level fixed by the Government, even in the case of a bumper crop.

MSP is price fixed by Government of India to protect the producer - 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 major objectives are to support the farmers from distress sales and to procure food grains for public distribution. In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price.

Who Decides MSP ?

The Cabinet Committee of Economic Affairs announces MSP for various crops at the beginning of each sowing season based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). The CACP takes into account demand and supply, the cost of production and price trends in the market among other things when fixing MSPs. The FCI, Food Corporation of India and Nafed, National Agricultural Cooperative Marketing Federation of India help the Centre procure select food crops with the help of the States. Procured farm products are kept in government warehouses and distributed through the PDS and various food security programmes.

What determines MSP?

Along with  different Ministries and Departments, Commission uses both micro-level data and aggregates at the level of district, state and the country takes into account, apart from a comprehensive view of the entire structure of the economy of a particular commodity or group of commodities, the following factors:-

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.

Effect on issue prices and implications for subsidy

Supply related information - area, yield and production, imports, exports and domestic availability and stocks with the Government/public agencies or industry

Demand related information - total and per capita consumption, trends and capacity of the processing industry

Prices in the international market and changes therein, demand and supply situation in the world market

Cost of processing of agricultural products and changes therein

Cost of marketing - storage, transportation, processing, marketing services, taxes/fees and margins retained by market functionaries; and

Macro-economic variables such as general level of prices, consumer price indices and those reflecting monetary and fiscal factors.

 What is open ended MSP?

 There are some crops which are vital for food security. To ensure and encourage the production of such crops, the government adopts a liberal procurement policy known as open ended MSP.

Open ended MSP, does not have any procurement targets. 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.

Difference between MSP and procurement price :

Procurement price are the prices which are higher than the MSP but lower than the market price. The procurement price are generally announced soon after the harvest. Another price, issue price, is the price at which the procured and buffer stock food grains are provided through the PDS.