Minimum Support Price (MSP)

Minimum Support Price (MSP)

The Minimum Support Price (MSP) is a form of market intervention by the government to insure agricultural producers against any sharp fall in farm prices. It is a predetermined price at which the government promises to purchase produce from farmers, regardless of market rates, to safeguard their interests. This policy tool aims to stabilize the income of the agricultural community and ensure their economic viability.

Introduced in India by the government in the 1960s, the MSP was part of the broader Green Revolution strategy that sought to increase food production and achieve self-sufficiency in food grains. The MSP is set for certain crops before their sowing seasons by the Government of India, based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). The primary objectives are to support the farmers from distress sales and to procure food grains for public distribution. Over the years, the MSP has covered an increasing number of crops, including cereals, pulses, oilseeds, and commercial crops, reflecting its critical role in India's agricultural policy framework.

The MSP mechanism has played a significant role in transforming the agricultural landscape of India, ensuring food security, and improving the socio-economic status of farmers. However, it has also been at the center of various controversies and debates, particularly regarding its implementation, impact on market prices, its contribution to environmental degradation, and the need for a legal guarantee. These discussions underscore the complexities of agricultural policy in India, balancing economic efficiency, environmental sustainability, and social equity.

What is the Minimum Support Price (MSP)?

In India, the Minimum Support Price (MSP) is a government-set price at which the government buys crops from farmers, regardless of the market price. This mechanism is designed to shield farmers from any sharp fall in the market prices of their produce, ensuring them a minimum profit for their harvest. The MSP is a crucial part of India's agricultural policy, aimed at supporting the country's vast agricultural sector and ensuring food security.

The MSP is set for various crops before their sowing seasons, providing a price guarantee to the farmers for certain crops. This system encourages farmers to cultivate certain crops with the assurance of a minimum income and helps in stabilizing food supplies. The crops covered under MSP include food grains like wheat, rice, maize, and barley; pulses like lentils, chickpeas, and pigeon peas; oilseeds like mustard, soybean, and sunflower seeds; and commercial crops like cotton and jute.

The MSP for each crop is recommended by the Commission for Agricultural Costs and Prices (CACP), a body under the Ministry of Agriculture and Farmers Welfare. The CACP considers various factors to recommend MSPs, such as the cost of production, changes in input costs (like fertilizer, labor, and irrigation), market price trends, demand and supply, and a reasonable margin for the farmers. The central government, after considering the CACP's recommendations, announces the MSPs for different crops.

The MSP system aims to:

• Assure minimum prices to the farmers and protect them against any sharp fall in market prices.
• Motivate production of certain crops to ensure food security.
• Stabilize the market by supplying the market with adequate food grains.

However, the MSP system also faces criticism for potentially leading to the overproduction of certain crops (especially water-intensive ones in water-scarce areas), environmental degradation, and the financial burden on the government due to procurement and storage of large quantities of crops. Moreover, the benefits of MSP are not uniformly distributed among all farmers across India, with small and marginal farmers often unable to sell their produce at MSP due to various constraints, including lack of access to the government procurement system.

Crops Under MSP in India

In India, the Minimum Support Price (MSP) covers a wide range of crops, which are categorized mainly into cereals, pulses, oilseeds, and commercial crops. The Government of India announces MSPs for 23 major agricultural crops each year, based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). These crops are strategically chosen to ensure a balanced approach towards both food security and the income security of farmers across various regions.

The mandated crops are 14 crops of the kharif season, 6 rabi crops and two other commercial crops. The crops covered under MSP include:

Kharif Crops

• Paddy (Common and Grade 'A')
• Jowar (Hybrid and Maldandi)
• Bajra
• Maize
• Ragi
• Tur (Arhar)
• Moong
• Urad
• Cotton (Medium Staple and Long Staple)
• Groundnut
• Sunflower Seed
• Soyabean (Black and Yellow)
• Sesamum
• Nigerseed

Rabi Crops

• Wheat
• Barley
• Gram
• Masur (Lentil)
• Rapeseed & Mustard
• Safflower
• Toria

Other Crops

• Copra (Milling and Ball)
• De-Husked Coconut
• Jute [1]

It's important to note that the list of crops under MSP can be reviewed and updated based on agricultural priorities, market conditions, and changing economic scenarios. The government periodically assesses and revises the MSPs before the sowing seasons of Kharif (summer) and Rabi (winter) crops to ensure they reflect the current cost of production and other relevant factors.

The MSP mechanism is designed to encourage diversified crop production, stabilize food grain supplies, and ensure remunerative prices to farmers. However, the effectiveness of MSP in reaching all farmers, especially small and marginal ones, and its impact on crop choice and environmental sustainability remain areas of ongoing debate and policy development.

How MSP has been Calculated in India?

The calculation of the Minimum Support Price (MSP) in India is a comprehensive process that takes into account various factors to ensure that the prices are remunerative for the farmers while also being in line with the market dynamics. The Commission for Agricultural Costs and Prices (CACP), which operates under the Ministry of Agriculture and Farmers Welfare, is the primary body responsible for recommending the MSPs for various crops. The process involves several steps and considers multiple parameters to determine the MSP for each crop.

On March 3, 2020, the government shared information about how it decides the Minimum Support Price (MSP) for crops. The MSP is set based on advice from the Commission for Agricultural Costs and Prices (CACP).

In the 2018-19 budget, the government promised to make the MSP at least one and a half times the cost of producing the crop. This means farmers would earn a 50% profit over their costs for the crops grown in 2018-19 and 2019-20.

However, some farmers and their groups want the MSP to be even higher, based on a different calculation of costs (called the C2 system).

When deciding on the MSP, the government looks at how much it costs to grow the crops. The CACP uses two ways to figure this out (A2+FL and C2) but mainly uses A2+FL to decide the MSP. They check the C2 costs to make sure the MSP is fair in different parts of the country.

The goal of the MSP is to make sure farmers get a good price for their crops, either by selling to the government at the MSP or in the open market.

The government has also tried other ways to help farmers get better prices, like buying crops directly, setting up an online market (eNAM), making new laws to improve how crops are sold, and supporting farmer groups.

They're also working on improving markets close to where farmers live and making the process of selling crops more open and fair through eNAM.

A big plan called Pradhan Mantri Annadata Aay SanraksHan Abhiyan (PM-AASHA) was started to guarantee fair prices for farmers, covering different types of crops and including schemes for when market prices are low or for private companies to buy crops.

The government makes sure farmers know about the MSP and how to sell their crops at these prices by using different ways to spread the word.

This information was provided by the Union Minister of Agriculture and Farmers Welfare, Shri Narendra Singh Tomar, in the Lok Sabha. [2]

Factors Considered for MSP Calculation

The CACP considers a wide range of factors while recommending MSPs, which include:

Cost of Production: This is one of the most critical components in calculating MSP. The cost of production is generally calculated based on three categories:

A2: It covers all paid-out costs directly incurred by the farmer in cash and kind on seeds, fertilizers, pesticides, hired labor, leased-in land, fuel, irrigation, etc.

A2+FL: It includes A2 plus an imputed value of unpaid family labor.

C2: This is a more comprehensive cost calculation that includes A2+FL plus imputed rent and interest on owned land and machinery. This cost is considered more holistic as it accounts for the opportunity cost of the farmer's investment.

Changes in Input Prices: The variations in the cost of agricultural inputs like seeds, fertilizers, labor, and irrigation are taken into account to ensure that the MSP is reflective of the current input costs.

Market Price Trends: Historical market data and future price trends are analyzed to ensure the MSPs are aligned with the market dynamics and can effectively protect farmers against price volatility.

Demand and Supply: Estimates of demand and supply for the commodities are considered to forecast the market scenario and ensure the MSPs are set in a way that can help in stabilizing the market.

Inter-crop Price Parity: The relative prices of different crops are considered to encourage farmers to cultivate crops that are in line with national needs and ensure a balanced food basket.

Terms of Trade Between Agriculture and Non-Agriculture: This involves analyzing the relative price movement of agricultural and non-agricultural commodities to ensure that farmers' income stays in line with the rest of the economy.

A Minimum of 50% Margin Over Cost of Production: The government has aimed to ensure that the MSP will be at least 1.5 times the cost of production (predominantly calculated over the A2+FL cost), aiming to provide farmers with a decent profit margin over their cost.

After considering these factors, the CACP prepares its recommendations for the MSP for each crop and submits them to the government. The government, after inter-ministerial consultations, takes the final decision on the MSPs to be announced for various crops for the upcoming sowing season.

It's important to note that while the MSP aims to provide a safety net to farmers, its implementation, and the extent to which farmers are able to sell their produce at MSP, varies across different regions and crops in India.

Why is There a Demand for Law on MSP in India?

The demand for a law on Minimum Support Price (MSP) in India arises from several socio-economic concerns faced by the agricultural sector, which is a significant part of the country's economy and employs a large portion of its population. The call for legal backing to MSP is driven by the following reasons:

1. Income Security for Farmers

A legal guarantee on MSP would ensure that farmers have a safety net, securing them a minimum income regardless of market fluctuations and volatility. This is particularly important for small and marginal farmers, who form the majority of the farming community in India and are most vulnerable to market risks and uncertainties.

2. Protection from Market Exploitation

Without a legal mandate, farmers are often compelled to sell their produce at prices lower than the MSP due to various market pressures, including a lack of bargaining power, immediate cash needs, and exploitation by middlemen. A law on MSP would aim to protect farmers from such exploitation by ensuring they receive fair compensation for their produce.

3. Encouragement for Sustainable Agriculture

Knowing that their crops will fetch at least the MSP, farmers might be more inclined to invest in quality inputs and sustainable farming practices. This can lead to better crop yields and encourage the cultivation of a wider variety of crops, including those crucial for nutritional security and ecological balance.

4. Reduction in Farmer Distress

The agricultural sector in India has been marred by high levels of distress, leading to a spate of farmer suicides over the years. One of the primary causes of this distress is financial instability and indebtedness among farmers. A guaranteed MSP could alleviate some of this distress by providing a predictable and stable income source.

5. Strengthening Food Security

By ensuring a fair and stable income for farmers, a law on MSP can also contribute to national food security. It can encourage the production of essential food grains and pulses, ensuring that the country's food supply meets its demand.

6. Political and Social Stability

Agriculture is not just an economic activity in India; it is deeply intertwined with the social and cultural fabric of the country. Ensuring the economic well-being of farmers through a law on MSP can contribute to social and political stability by addressing rural discontent and agitation.

However, the proposal for a legal MSP guarantee faces criticism and challenges, including concerns about its potential impact on market dynamics, fiscal implications for the government due to large-scale procurement, and the possibility of distorting cropping patterns in favor of MSP-covered crops at the expense of others.

Despite these challenges, the demand for a law on MSP continues to be a contentious and crucial issue in India's agricultural and political discourse, reflecting the broader debates on economic policy, social justice, and the future of agriculture in the country.

What are the Key Challenges in Legalising MSP?

Legalizing Minimum Support Price (MSP) in India involves several complex challenges and considerations. These can be broadly categorized into economic, administrative, and market-related issues:

Economic Challenges

Fiscal Burden on the Government:

Implementing MSP as a legal right would require the government to potentially buy large quantities of various crops to support prices. This could lead to a significant financial burden in terms of procurement costs and storage infrastructure, impacting the fiscal deficit.

Inflationary Pressures:

Guaranteeing MSP for a wide range of crops could lead to inflationary pressures. If the government passes on the increased procurement costs to consumers, it could lead to higher food prices.

Distortion of Market Signals:

A legally guaranteed MSP might encourage overproduction of certain crops, leading to market distortions. Farmers may prefer to grow crops with assured MSP over others, potentially leading to an imbalance in crop production and neglect of non-MSP crops.

Administrative and Implementation Challenges

Procurement and Storage:

Expanding MSP to more crops and regions would require significant scaling up of procurement and storage facilities. India's existing infrastructure may not be adequate to handle such an expansion, leading to issues like rotting of stocks, inadequate storage, and logistical challenges.

Quality Control:

Ensuring quality control becomes challenging with large-scale procurement. The government might end up procuring crops of inferior quality at MSP, leading to financial losses and wastage.

Targeting and Identification:

Identifying eligible farmers and ensuring that the benefits reach the intended beneficiaries without leakage or corruption is a significant challenge in a country with a vast and diverse agricultural sector.

Market-related Challenges

Impact on Export Competitiveness:

High MSPs can make Indian agricultural produce more expensive in international markets, affecting export competitiveness. This can lead to surplus stocks domestically, further straining government resources.

Private Sector Participation:

Legalizing MSP could discourage private sector participation in the agricultural market. Private traders might be reluctant to purchase crops at higher prices, leading to a situation where the government becomes the primary buyer.

Flexibility in Crop Choices:

A legal MSP framework might reduce the flexibility for farmers to switch crops based on market demand, leading to inefficiencies and potential environmental issues due to the overuse of resources for certain crops.

Broader Economic Implications

Resource Allocation:

A legal MSP could lead to inefficient resource allocation, with water, land, and inputs being diverted to MSP-supported crops, which might not be the most sustainable or needed crops from an environmental or market demand perspective.

Global Trade Commitments:

India's commitments under international trade agreements, such as those with the World Trade Organization (WTO), could be impacted. Other countries might view guaranteed MSPs as a form of trade-distorting subsidy, leading to potential disputes.

Addressing these challenges requires careful policy design, significant resources, and efficient implementation mechanisms to ensure that the objectives of supporting farmers and ensuring food security are met without adverse economic consequences.

Counterpoints to Consider

Economic Viability vs. Social Justice: While the economic arguments against legalizing MSP focus on market efficiency and fiscal prudence, the counterpoints often emphasize social justice, equity, and the need to protect small and marginal farmers from market volatilities.

Innovative Solutions: Addressing the challenges of legalizing MSP requires innovative solutions, including the use of technology in agriculture, diversification towards high-value crops, and developing robust rural infrastructure.

Balancing Act: The debate underscores the need for a balanced approach that safeguards farmers' interests without compromising on market efficiency or fiscal sustainability. This could involve a mix of policies including but not limited to MSP, such as crop insurance, direct income support, and investment in agricultural research and infrastructure.

In essence, the debate on legalizing MSP in India is a reflection of broader themes in agricultural policy, including the need to balance economic efficiency with social equity, the role of government in agricultural markets, and the pursuit of sustainable and inclusive agricultural development.

Controversies on MSP

The proposal to legalize Minimum Support Price (MSP) in India has stirred several controversies, reflecting deep divisions between different stakeholders within the agricultural sector and beyond. Here are some of the key controversies:

1. Farmer Protests

The introduction of three agricultural laws in 2020 sparked widespread protests among farmers, especially in Punjab, Haryana, and Uttar Pradesh. While the laws aimed at liberalizing the agricultural markets, many farmers feared they would lead to the dismantling of the MSP system, pushing them into exploitative negotiations with large corporations.

Controversy: The protests highlighted a deep distrust among farmers towards the government's agricultural reforms and a strong demand for the legal guarantee of MSP to protect their incomes.

2. Economic vs. Social Objectives

Economists and policy analysts are divided on the issue of MSP. Some argue that legalizing MSP would distort free market mechanisms, lead to inefficiencies in agricultural production, and increase fiscal deficits.

Controversy: This positions economic efficiency and fiscal prudence against social objectives like poverty alleviation, food security, and addressing rural distress, leading to a contentious debate on the priorities of agricultural policy.

3. Impact on Small Farmers

A significant concern is that the current MSP procurement system benefits a relatively small proportion of farmers, primarily those growing wheat and rice, and mainly in certain states like Punjab and Haryana.

Controversy: The debate revolves around whether legalizing MSP would actually benefit the majority of farmers, who are small and marginal, or whether it would predominantly support larger farmers who are already engaged in the MSP system.

4. Federalism and State Rights

Agriculture is a subject under the State List in the Indian Constitution, giving states the primary responsibility and authority over agricultural policies.

Controversy: The central government's move to legislate on matters traditionally within the state's purview has led to accusations of eroding federalism, with states arguing that such centralization undermines their autonomy and the ability to tailor policies to local needs.

5. Environmental Concerns

Context: Critics argue that the MSP system, as currently implemented, encourages the cultivation of water-intensive crops like rice and wheat, contributing to water depletion and soil degradation in certain areas.

Controversy: The environmental impact of MSP and its role in promoting unsustainable agricultural practices has led to debates on how to balance income support for farmers with environmental sustainability.

6. Inflation and Consumer Prices

There is concern that legalizing MSP could lead to higher food prices for consumers, as farmers would be incentivized to sell at the minimum price or above.

Controversy: This pits the interests of farmers against those of consumers, particularly urban consumers, and raises questions about the overall economic impact of MSP on inflation and living costs.

These controversies reflect the complex and multifaceted nature of agricultural policy in India, where economic, social, environmental, and political dimensions intersect. The debate over MSP legalization is not just about the price mechanism but touches upon broader issues of social justice, sustainability, and the structure of the agricultural economy.

MSP calculations still continue with old formula

On October 18, 2023, the Indian government announced it would raise the Minimum Support Price (MSP) for six crops grown during the Rabi season for the year 2024-25. This decision brought back discussions about the government not following the suggestions of the MS Swaminathan Commission. The Commission had recommended that the MSP should include a profit margin of 50% over the production cost.

If the government had followed these recommendations, the MSP for crops like rapeseed, mustard, wheat, safflower, barley, gram, and lentils would be higher. For instance, the new MSP for wheat is Rs 2,275 per quintal, but according to the Commission's suggestion, it should be Rs 2,478 per quintal. This means farmers are getting Rs 203 less for every quintal of wheat they sell at the market.

The government's recent MSP increase was the highest for lentils, at Rs 425 per quintal, and then for rapeseed and mustard, at Rs 200 per quintal. Wheat and safflower saw a rise of Rs 150 per quintal, while barley and gram had their MSP increased by Rs 115 and Rs 105 per quintal, respectively.

MSP is the price at which the government promises to buy crops from farmers. How much the MSP is set at depends on how the cost of production (CoP) is calculated. Farmers have long demanded that MSP be based on the Swaminathan report, which became a key issue during the farmers' protest in 2021-22.

The government sets the MSP based on advice from the Commission for Agricultural Costs & Prices (CACP), which uses three main methods to calculate CoP:

• - A2: Direct costs faced by farmers like seeds, fertilizers, pesticides, machinery, and labor.
• - A2+FL: A2 costs plus the value of family labor.
• - C2: A comprehensive cost that includes A2+FL, plus rent for owned land and interest on capital.

The Swaminathan Commission suggested that MSP should be at least 50% more than the C2 cost. However, the government has been setting the MSP at 1.5 times the A2+FL cost, not the C2 cost, leading to disagreements with farmer groups.

When the Cabinet Committee on Economic Affairs (CCEA) approved the new Minimum Support Prices (MSP) on October 18, it based its calculations on the 'A2+FL' costs, which represent the direct expenses farmers incur, plus the value of family labor.

However, if the government were to use the 'C2+50%' formula suggested by the MS Swaminathan Commission, which includes a wider range of costs plus a 50% profit margin, the MSP would be significantly higher. According to this formula, the difference between the current MSP and what farmers are asking for would vary from Rs 203 to Rs 1,380 for each quintal, depending on the type of crop. This highlights the gap between the government's MSP calculations and the farmers' expectations based on a more comprehensive cost assessment.[3]